Wild Values: Putting a Price on Nature Steve Colt, Institute of Social and Economic Research Science and Society Lecture Series University of Alaska Anchorage.

Wild Values: Putting a Price on Nature

Steve Colt, Institute of Social and Economic Research

Science and Society Lecture SeriesUniversity of Alaska Anchorage

16 October 2000

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Economic Valuation of Nature

• Context• What is it?

•How do we do it?• Should we do it?• Must we do it?

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Economic Valuation of Nature:

Context

• Like other goods, environmental goods and services are scarce

• Society must (and does!) make tradeoffs

• Trade-offs are best made by comparing benefits to costs

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Economic Valuation of Nature:

Context• Many environmental goods and

services are “public goods”– They are available to all– My consumption does not affect your

consumption– Clean air, Clean water, Climate

• Others are provided by government– Hunting and fishing opportunities– Recreation

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Economic Valuation of Nature: Context

– Hence,

• Environmental goods and services are often not bought and sold in markets

• Environmental goods and services must often be provided through collective social processes (politics!)

• Politics translates individual preferences into collective action

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Economic Valuation of Nature: Context

– Hence,

• “The issue of valuation is inseparable from the choices and decisions we have to make about ecological systems”– (Costanza et al 1997)

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Economic Valuation of Nature: What is it?

• An attempt to measure people’s preferences for human actions likely to affect natural systems.

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Economic Valuation of Nature:What is it?

• An attempt

– Imperfect– New and evolving techniques

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Economic Valuation of Nature:What is it?

• An attempt to measure

– Quantitative– Uses money as the measuring

rod, for comparability with other values

– Willingness to pay (WTP) or to accept payment (WTA)

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Economic Valuation of Nature:What is it?

• An attempt to measure people’s preferences

– People make decisions and take action

– Social scientists measure what people already feel

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Economic Valuation of Nature:What is it?

• An attempt to measure people’s preferences for human actions likely to affect natural systems – Development, management,

preservation and protection are all actions

– Natural systems often require collective management

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What are we Valuing?

• Use Values– Fishing, hunting, recreation– subsistence– ecosystem services (life support)

• Non-use Values– Called existence, passive use,

intrinsic– Includes aesthetics, cultural heritage

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How do we do it?

• Actual market prices• Market prices of related

goods– Hedonic methods

• Observation of behavior– Travel Cost

• Ask people– Contingent Valuation

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Using Market Prices: ExampleReplacement Cost of

Subsistence

• 53.5 million lbs harvested• 100+ % of protein needs in rural

Alaska• Replacement cost = ?? $4 per lb• Replacement value = 53.5 x 4 =

$214 million

– Source: ADFG 1998 “Subsistence Update”

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Using Market Prices: ExampleReplacement Cost of

Subsistence

• Reality check against expenditures on inputs:– $3.18 million spent in 3 wildlife refuges– 1.76 million lbs harvested– $3.18/1.76 = $1.81 per lb actually

spent on commercial inputs– Excludes labor by harvesters

– Source: Goldsmith 2000, Colt 2000

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Using Market Prices: ExampleReplacement Cost of Worldwide

Ecosystem Services

• Divide entire world into 16 ecosystem types

• Look at 17 ecosystem functions• What does it cost to replicate

these functions?

– Source: Costanza et al 1997

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Example: Using Market PricesValue of Worldwide Ecosystem

Services

• Nutrient Cycling $17 trillion / yr• Waste treatment $2.3 trillion / yr• Water regulation & supply $2.9 trillion / yr• Gas regulation $1.3 trillion / yr• Recreation $0.8 trillion /yr• Cultural benefits $3.0 trillion / yr

• TOTAL = $33 trillion /yr• Compare to gross world product of $18

trillion / yr

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Example: Hedonics

• Idea: property values reflect a “bundle of attributes” – safe streets, good schools, nice neighbors, environmental quality,– Hence,

• Variations in property values can be tied to variations in environmental quality

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Example: Hedonics

• Land Values in Mat Su Valley• Berman (1987) regression

equation• Value of parcels declines with

distance from Anchorage• Value of parcels declines with

number of close neighbors• Value of parcels increases with

proximity to public open space

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Example: Observed BehaviorValue of Alaska Fish

(Based on ISER sport fishing study, 1993 data)

• Travel Cost Method (TC)– People incur a travel cost to fish– Those facing higher travel cost make

fewer trips to a given site– Use this relationship between number

of trips and (travel) cost per trip to estimate net economic value of activity

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Example: Observed BehaviorValue of Alaska Fish

• Example of TC Data:– I live at the fishing site, TC=0, make 6

trips– Brother lives ten miles away, TC = 10,

make 3 trips– Cousin lives 20 miles away, TC = 20,

makes zero trips

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Example: Observed BehaviorValue of Alaska Fish

• Draw a graph:

- 5

0

5

10

15

20

25

0 2 4 6 8

trips per person

cost

per

tri

p

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Example: Observed BehaviorValue of Alaska Fish

• Assume all three people have similar preferences

• Compute net economic value– Me: between 30 and 60– Brother: between 0 and 15– Cousin: zero

– TOTAL: between 30 and 75

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Example: Observed BehaviorValue of Alaska Fish

• ISER Methodology:– Telephone and mail surveys of more

than 5,000 residents and nonresidents

– Construction of travel costs to multiple sites

– Nested multinomial logit models relate fishing behavior to many variables including travel cost

– Net economic value computed from models

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Example: Observed BehaviorValue of Alaska Fish

• ISER Results (1993):– People Actually paid: $550 million– People were willing to pay an

additional $186 million to fish– $186 million is the net economic

value of the sport fishery

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Example: Observed BehaviorValue of Alaska Big Game

• ADF&G used survey data to estimate TC models for hunting trips

• Net values estimated by species and by resident / nonresident status

• Total net value of hunted species in year 2000 = $23.5 million

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Net Economic Value of Alaska Big Game(McCollum & Miller 1994, Colt 2000)

Species ResidentNon-

resident ResidentNon-

resident ResidentNon-

resident Total

Black Bear $181 $434 2,807 1,187 0.5 0.5 1.0Brown Bear $246 $718 1,238 1,679 0.3 1.2 1.5Caribou $200 $512 15,685 4,045 3.1 2.1 5.2Moose $214 $465 44,579 3,079 9.6 1.4 11.0Wolf NA $416 248 486 0.2 0.2Sheep $316 $583 - 1,419 0.0 0.8 0.8Goat $149 $497 1,073 179 0.2 0.1 0.2Deer $169 $263 13,456 377 2.3 0.1 2.4Elk $117 $104 908 141 0.1 0.0 0.1Waterfowl $118 $560 7,430 192 0.9 0.1 1.0

All Species $194 $513 87,424 12,782 16.9 6.6 23.5

Net Economic Value ($ million)Net Economic Value per Trip

Number of Trips

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Example: Ask PeopleExistence Value of Prince

William Sound

• State of Alaska, for EVOS trial• 1,043 completed in-person interviews

using nationwide sample• Asked people how much they would pay

to avoid another spill• Used the median value of $31 per

household• $31 x 90.3 million households = $2.8

billion

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Example: Ask PeopleExistence Value of Prince

William Sound

• Construct Scenario – There will be another spill in 10 years…

• Include possible action– Unless we implement the following

plan…

• Ask “Take-it-or-leave-it” questions– Would you pay $15 in higher taxes to

implement the plan

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Example: Ask PeopleExistence Value of Prince

William Sound

• Use different amounts ($5-$250) to elicit range of willingness to pay

• Importance of the proposed payment vehicle– EVOS study used general tax after

considering gasoline tax, higher gasoline prices

– Used lump sum one-time payment

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Problems with Contingent Valuation

• Hypothetical market, not actual transaction– CV estimates understate TC for same

goods• Information effects• Scope effects – Does WTP increase

“correctly” with scope of proposed action?– Recent research suggests scope does

matter as it should

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Contingent Valuation in Practice

• Tentatively endorsed by NOAA Panel

• Quality depends on execution– In-person interviews– Discrete choice question– Clear description of scenario

• Used by “most federal” and “many state” agencies (Carson 1999)

• Dominant methodology today

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Economic Valuation: Should we Do it?

• Problems:– Whose values count? (WTP always

depends on income)– Reducing complex choices to one

dimension ($)• A Trojan Horse? (Weeden 1987)

• Cash as the “great homogenizer”

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Economic Valuation: Must we Do it?

• Yes – we do it everyday, implicitly• Yes – we know how to do it• Yes – The alternative to conscious

valuation is a zero valuation• Yes – valuation is one, useful, tool

– “We can find ways to use the sharp-edged techniques of economic valuation without cutting our jugulars” (Weeden 1987)