Wild Values: Putting a Price on Nature Steve Colt, Institute of Social and Economic Research Science and Society Lecture Series University of Alaska Anchorage 16 October 2000

2 Economic Valuation of Nature Context What is it? How do we do it? Should we do it? Must we do it?

3 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

4 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

5 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

6 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)

7 Economic Valuation of Nature: What is it? An attempt to measure people’s preferences for human actions likely to affect natural systems.

8 Economic Valuation of Nature: What is it? An attempt –Imperfect –New and evolving techniques

9 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)

10 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

11 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

12 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

13 How do we do it? Actual market prices Market prices of related goods – Hedonic methods Observation of behavior – Travel Cost Ask people –Contingent Valuation

14 Using Market Prices: Example Replacement 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”

15 Using Market Prices: Example Replacement 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

16 Using Market Prices: Example Replacement 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

17 Example: Using Market Prices Value 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

18 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

19 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

20 Example: Observed Behavior Value 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

21 Example: Observed Behavior Value 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

22 Example: Observed Behavior Value of Alaska Fish Draw a graph:

23 Example: Observed Behavior Value 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

24 Example: Observed Behavior Value 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

25 Example: Observed Behavior Value 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

26 Example: Observed Behavior Value 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

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

28 Example: Ask People Existence 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

29 Example: Ask People Existence 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

30 Example: Ask People Existence 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

31 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

32 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

33 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”

34 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)