1. Economic Analysis March 2004 Maine Economic Principles

2. Types of Economic Analysis With/Without Benefit Cost Analysis Cost Effective Analysis Partial Budget Marginal Analysis Enterprise Budgets Net Worth Statement

3. Future With and Future Without Compare future with conservation to the future without it Benefits of conservation determined by the difference between with and with out Always have the effects of “do nothing” compared to effects with conservation installed

5. Sediment Damage

6. Benefit Cost Analysis Total benefits compared to total costs – usually expressed as a ratio (such as $1.10 to $1) >$1/$1, GOOD! <$1/$1, NOT AS GOOD Used mostly for area-wide projects and national programs Required by law for certain programs

7. Benefit Cost Analyses of Conservation Programs

8. Economics of CRP +Increased net farm income$2.1 to $6.3 billion +Value of future timber$3.3 billion +Preservation of soil productivity$0.6 to $1.7 billion +Improved surface water quality$1.3 to $4.2 billion +Reduced windblown dust$.3 to $.9 billion +Enhanced small game hunting$1.9 to $3.1 billion $9.5 to $19.5 billion -Higher food cost to consumers$2.9 to $7.8 billion -Veg. Cover establishment$2.4 billion -USDA tech. Asst.$.1 billion $5.4 to $10.3 billion Net Value = $4.1 to $9.2 billion Source: Osborn and Konyar (1990) +Increased net farm income$2.1 to $6.3 billion +Value of future timber$3.3 billion +Preservation of soil productivity$0.6 to $1.7 billion +Improved surface water quality$1.3 to $4.2 billion +Reduced windblown dust$.3 to $.9 billion +Enhanced small game hunting$1.9 to $3.1 billion $9.5 to $19.5 billion -Higher food cost to consumers$2.9 to $7.8 billion -Veg. Cover establishment$2.4 billion -USDA tech. Asst.$.1 billion $5.4 to $10.3 billion Net Value = $4.1 to $9.2 billion Source: Osborn and Konyar (1990) National benefits/costs

9. Kenduskeag Watershed Project Economic Benefits Type of Economic BenefitAverage Annual $ Increased fishing opportunities$71,050 Recreation$62,700 Maintaining yields$18,510 Yield improvements$48,450 More efficient fertilizer use$17,730 More efficient pasture mgmt.$69,300 Total Benefits$287,740 Total Costs$270,040 Benefit – Cost Ratio$1.07 Adapted from Watershed Plan – EA, Kenduskeag Stream Watershed, November, 1988

10. Monetary vs. Non-Monetary Benefits Market goodsMarket goods lumber, grain, cars, pencils, etc. Non-market goodsNon-market goods clean water, scenic farmland, wetland functions/values, wildlife

11. Non-monetary Benefits How to put a $ value on goods/services not traded in the market? Contingent valuation Travel cost method Hedonic Studies ?

12. Environmental Quality Pollution Level Property Price ($) Hedonic Studies

13. Maine Lakes willingness of users to pay for water quality: $2 to $6 million per year >200,000 Mainers spend ~$100 million per year in recreation associated with lakes 1 meter reduction in summertime water clarity: 3 - 5% reduction in lakefront property value Source: 2000 National Water Quality Inventory Report, EPA, p. 64. www.epa.gov/305b

14. Cost Effectiveness A tool to measure the effectiveness of a practice or plan relative to its cost Used to obtain a set objective at the least cost, OR To obtain the best results at a set cost

15. Cost Effectiveness Best Buy What is the better deal when comparing the amount of physical effects and the cost to get it 1 fish per 50 mile trip or 3 fish per 100 mile trip???

16. Two hypothetical questions that cost- effectiveness would try to answer: If we have $1 million, how can we get the most conservation possible? Constant cost If we want to reduce pollution by 40 percent, what is the cheapest way to do that? Constant effects

17. Cost-effectiveness (cont.) Costs are associated with a particular unit reduction or increase (the effect)  Lbs of N prevented from reaching streams  Tons of soil saved  Acres of habitat created  Number of life-years saved  Ducks made happy (?)

18. C-E Example 1: Constant Effects PlanABCD Cost ($/year) 50,00012,00010,00030,000 Effect (T/A/Y saved) 10 Ratio ($/T/A/Y) 5,0001,2001,0003,000

19. C-E Example 2: Constant Cost PlanABCD Cost ($/year) 50,000 Effect (T/A/Y saved) 108153 Ratio ($/T/A/Y) 5,0006,2503,33316,667

20. C-E Example 3: Costs & Effects Vary PlanABCD Cost ($/year) 50,00020,00090,0006,000 Effect (T/A/Y saved) 108153 Ratio ($/T/A/Y) 5,0002,5006,0002,000

21. Cost-effectiveness in Ranking Systems

23. Partial Budgeting A planning and decision-making framework used to compare the costs and benefits of alternatives faced by a farm business.

24. Partial Budgeting Systematically displays the positive and negative effects of a change Only those factors that change are considered anyUseful tool for analyzing almost any type of change

25. Situations where a farm might use partial budgets Substituting one crop for another Adding a few head to a livestock enterprise Taking advantage of an early payment discount on a fertilizer bill Adopting a new production practice Participating in a government program

26. Partial Budget Elements Added Income +Reduced Costs ______________ Total Positive Effects Added Costs +Reduced Income _______________ Total Negative Effects

27. Partial Budget Positive Effects (+) Negative Effects (-) Reduced CostsIncreased Costs Increased IncomeReduced Income 1.____________________________ 2.____________________________ 3.____________________________ 1.____________________________ 2.____________________________ 3.____________________________ 1.____________________________ 2.____________________________ 3.____________________________ 1.____________________________ 2.____________________________ 3.____________________________ Total + ________Total - ________

29. ItemCurrent System Clear forest, till additional land Shorten system Move and shorten system Irrigated acres62735055 Crop income$7,440$8,760$6,000$6,600 Reduced income -- $370$216 Land clearing --$257 -- Mitigation --$206 -- Move & shorten -- $515 Fuel$1,122 Labor & Maintenance $3,720$2,920$2,000$2,200 Insurance$868 Net Income$1,730$3,386$1,640$1,679 Change from current system --$1,657-$90-$51

30. Marginal Analysis Think at the margin - we look at the last increment Trying to find the most economical input level Marginal Benefit equal to or greater than Marginal Cost Common sense to have the income or value of the product greater than the cost

32. WHERE DO WE WANT TO BE? WHERE MVP >=MC