Chapter 11 Recreation1 CHAPTER 11 Recreation and the rural economy

Chapter 11 Recreation Typical questions Tourism and recreation: public or private good/service? Which factors determine recreational behavior How to value recreation? Who can best supply recreation goods/services? What is special about tourism and recreation in rural areas? 2

Chapter 11 Recreation Overview Two basic theories of recreation Demand side for recreational activities Total economic valuation (recreation) Demand factors and demand analysis Pricing Supply side Multiple land use (basic principles) How to derive land values of recreational activities? 3

Chapter 11 Recreation Demand side: Why recreation? (1) Compensation theory recreation behavior is seen as a counterbalance/compensation for –living and working conditions of every day –central: contrast between living/working conditions and outdoor recreation limited empirical support (2) Complement theory works less in terms of contradictions and more in terms of limited changes humans explore their environment recreational provisions within and outside living place have more a complementary function more empirical support 4

Chapter 11 Recreation Total Economic Value (recreation) Total value Value measurable by the price mechanism Value not measurable by the price mechanism Primary benefitsSecondary benefits Use value Current use value: Primary benefits Future use value: Option value 5

Demand factors for recreation in rural areas Spatial factors - people are influenced by: –their outdoor environment and their living circumstances –location of their house –transport possibilities (routes, public transport, own car) –location of recreation facilities 6Chapter 11 Recreation

Demand factors for areas recreation Non-spatial factors technological, demographic, social- cultural, socio-economic, policy factors ageing/graying of population => might lead to structural changes generational differences 7

Chapter 11 Recreation Demand function for recreation If it would be a normal market good, then it fits within general demand theory and modeling Often part of the provision of recreational services consists of non-market provision –Gives special difficulties in deriving the demand for recreation Here along the line of a simple (partly hypothetical) demand function 8

Chapter 11 Recreation Demand function Q i = f(P i,P s,Y; other) Quantity of demand Q i –Dimension could be Participation / Standardized units of participation Frequency of participation Price of recreational activity P i –price is not easy to obtain! –price (based on costs) is often an composite variable average costs of participation (equipment, entrance fee, travel cost, etc.) marginal cost of participation (entrance fee, travel cost) –participation decision depends on ATC –frequency of participation depends on MC –E p d = elasticity : ‘quantity change’ in relation to ‘price change’ 9

Chapter 11 Recreation Demand function Q i = f(P i,P s,Y; other) Price of other goods and services P s substitutes / complements / independent Income Y –Q i = f(Y|P i,P s ; other) –E y d = income elasticity of demand  1 luxury goods normal goods (for recreational goods circa 0.8?)  0 inferior goods 10

Chapter 11 Recreation Demand function Q i = f(P i,P s,Y,D,E,C,T) Income distribution D –can be measured via e.g. Lorenz curve –a change can influence the quantity of demand Population grow and structure E –increase of population  proportional change in quantity of demand –a change in population structure (e.g. ageing) will change the demanded amount Taste en preferences C –most variable factor –key factors are age and gender Technology changes T 11

Travel cost method – an example Starts from actual observations on behaviour We take an example of a valuation of an ecosystem (see relation to Chapter 10) [ available online: 12Chapter 11 Recreation

Travel cost method – example Situation: recreational fishing site is threatened by development nearby. Pollution from the development may destroy fish population and decrease the opportunity for recreational fishing on the site. Question: what is the value of programs / actions to protect the fishing site? This is the same question as: what is the valuation of the fishing site (as a recreational area) 13Chapter 11 Recreation

Travel cost method – example Travel cost method: –Information is collected on number of visits to the site from different locations (distances) –Travel and time costs will increase with distance so this allows researcher to calculate number of visits ‘purchased at different prices’ –Demand functions are derived, and economic benefits (consumer surplus) of the recreational site are calculated 14Chapter 11 Recreation

Travel cost method – example 15Chapter 11 Recreation

Travel cost method – example 16Chapter 11 Recreation

Travel cost method – example Use regression analysis to relate visits per capita to travel costs (and other variables): –Visits/1000 = 330 – 7,755*travel cost And derive demand functions (point 1 = current visits without entrance fee; point 2: assume 10 $ entrance fee) 17Chapter 11 Recreation

Travel cost method – example 18Chapter 11 Recreation

Travel cost method – example Different points on the demand curve are calculated by assuming different entrance fees Derive total economic benefits of the recreation site, i.e. Area under demand curve Conclusion: actions to save the site are worthwhile if they cost less than total economic benefits 19Chapter 11 Recreation

Revealed preference techniques Travel cost method –Calculated from number of visits and travel costs –Travelling is a disutility –Does not consider substitution possibilities –Only the use value is estimated –How to valuate time? 20Chapter 11 Recreation

Revealed preference techniques Hedonic pricing –Based on price differences due to specific characteristics (e.g. the environment) –Often based on differences in house prices (transactions of a property which has both individual characteristics and an implicit valuation of the ‘environment’) –Data and level of detail can be a problem Example P = ‘transaction’ price ; z’s are attributes 21Chapter 11 Recreation

In practice Method depends a lot on: –Type of question –Available data There will always be discussion about non-market valuation methods; but here you find one of the examples how to operate 22Chapter 11 Recreation

Supply side Scale effects and fixed cost problems recreation en nature areas must have a certain dimension –indivisibility (lumpiness) on the production side –surroundings might be important –huge investments –large part fixed cost  application of marginal cost rule is difficult 23

Supply side Scale effects and fixed cost problems High costs and large part fixed cost –private sector will not provide such goods –are a result of indivisibility on the production side indivisibility leads to non-rivalry in consumption i.e. the marginal cost of the use is equal to zero (or low) Welfare theory –price should be equal to MC ( marginal cost rule ) –applying this rule does not cover all the costs (see figure) 24Chapter 11 Recreation

Large fixed cost and solutions Supply side: High costs and large part fixed cost –private sector will not provide such goods –are a result of indivisibility on the production side indivisibility leads to non-rivalry in consumption i.e. the marginal cost of the use is equal to zero or low Welfare theory –price should be equal to MC ( marginal cost rule ) –applying this rule does not cover all the costs (see figure) 25

Chapter 11 Recreation Large fixed cost and solutions 26

Chapter 11 Recreation Solutions (1) set the price equal to the MC –solution is efficient –however, there is a loss (available capacity is not used) –Subsidizing? => government intervention (2) two-part pricing –consumers pay a price based on the MC ( e.g. depending on their use) and a fixed charge that cover the difference between revenues and total costs –this system can be applied in a club 27

Chapter 11 Recreation Focus of the analysis of recreation and tourism Many studies focus on the demand side The supply is already available: recreation areas; nature parks; forest; etc. Demand analysis is easier? Supply side is often mainly done along the lines of public good provision –Proper Cost Benefit Analysis? –Often only budgetting 28

Chapter 11 Recreation Basic framework for the supply of non-marketed goods and services Assume that a decision unit produces both marketed goods (Y); price p; Non-marketed goods and services (H) Using variable inputs (X), price w; Quasi-fixed inputs (Z) by production technology T (all variables can be vectors!) Production set Profit function Marketed output supply Input demand Shadow price of quasi fixed Shadow costs of non-marketed goods and services 29

Chapter 11 Recreation Non-marketed goods and services; no reward! Assume that a decision unit produces both marketed goods (Y); price p; Non-marketed goods and services (H) Using variable inputs (X), price w; Quasi-fixed inputs (Z) by production technology T (all variables can be vectors!) Production set Profit function Marketed output supply Input demand Shadow price of quasi fixed input Shadow costs of non-marketed goods and services =0 30

Chapter 11 Recreation Non-marketed goods and services; reward v per unit H! (Let’s focus) Profit function Marketed output supply Input demand Shadow price of quasi fixed input Shadow costs of non-marketed goods and services =v This implies: H is adjusted; Y, X and s z are changing It might be attractive to switch to a new technology 31

Chapter 11 Recreation What happens if the decision unit produces H as (partly subsidized) a marketed good? Might be relevant for (1) recreational production; (2) dual/multi purpose production Y and H end up in the same category We may observe (depends on technology): Dual/multi purpose units Specialized units 32

Chapter 11 Recreation Two different examples (technologies) Y1Y1 H1H1 Easy substitution Concave ppc Difficult substitution Convex ppc Y1Y1 H1H1 p 1 /v 1 33

Chapter 11 Recreation Some typical situations: Increased supply of a non-marketed good/service No measurable or negative regular output effect: Increase / decrease of shadow price of a quasi-fixed input (e.g. land) 34

Chapter 11 Recreation How to measure the consequences of a change in non-market goods/services? Effect primary producer Induced input effect Induced production effect Government budget Depends on specific conditions, available data / models, how to further elaborate this question; see also the consumption side and the additional non-market valuation 35

Chapter 11 Recreation Effects of recreation and tourism on the rural economy Direct effects –Output size (recreation tourism) –Input size –Price changes (input and output) –Profit; subsidies; –Positive and negative external effects Indirect effects –Related industries Cost Benefit Analysis (see Chapter 7) –Valuation external effects Model of the rural economy? 36

Chapter 11 Recreation Spatial elements Via the ‘well known’ gravity equation; often for research puposes –Definition of variables is crucial! Searching optimal locations: Reilly Index? 37

Chapter 11 Recreation Conclusions The demand side of recreation and tourism in studied most In rural areas there is often a strong link between recreation, nature/wildlife, landscape, etc. It is possible to analyze supply of non-market goods in relation to market goods in a consistent framework Distance plays a role in particular for recreation 38