Economic evaluation:
Travel Cost Modeling and Discounting
Readings:
Walsh, Richard G., 1986.
Recreation
Economic Decisions. State College, PA: Venture. Chapter 8, 195-248.
McAllister, D.M., 1980. Evaluation
in Environmental Planning. Cambridge, MA: MIT. Chapter 7, 105-123.
Travel Cost Modeling (TCM)
The economic value of a travel experience
is the
sum of the costs incurred in participating
Direct costs -- transportation,
hotels, meals, entrance fees.
Amortized costs -- special equipment,
running costs of the family car, cameras.
Indirect costs -- health care, insurance,
lost income.
An example: Birders Paradise
The value of a restored wetland in the Great
American Bottoms
I have used a Travel Cost Method to start
to assess the value of visitor use of a proposed wetland. I have not included
the estimated costs of making the wetland.
I have assumed:
-
35,000 school-kid visitors per annum -- based
on 10 school buses a week for 30 weeks (10*50*30=15,000)
and some casual visitors ...
-
100 day visitors per summer weekend day (100*2*30=6,000)
-
20 day visitors per regular day (20*300=6,000)
-
4 in each car -- averaging over the minivans
full of kids and the birders travelling two-to-a-car.
-
40 rooms booked at the local motel each weekend
during summer, average two nights stay two to a room (40*2*2*30=4,800)
...
-
3/4 of the visitors eating meals at the restaurant
-- the overnighters eating three meals on the economy; the adult day visitors
just one meal; the schoolkids none.
-
etc...
| Birder's Paradise |
|
|
|
| assumed visitors per annum |
35,000 |
|
|
|
|
|
|
|
| expenditure |
unit cost |
# of units/visit |
units/annum |
$$ per annum |
|
|
|
|
|
| transport/ml |
$0.25 |
100.00 mls |
15,000 |
$375,000.00 |
| meals |
$10.00 |
1.00 |
20,000 |
$200,000.00 |
| accommodation |
$50.00 |
2.00 |
1,200 |
$120,000.00 |
| books, postcards |
$5.00 |
1.00 |
35,000 |
$175,000.00 |
| trinkets |
$4.00 |
0.50 |
35,000 |
$70,000.00 |
| special clothing |
$2.00 |
1.00 |
35,000 |
$70,000.00 |
| special equipment |
$4.50 |
0.25 |
35,000 |
$39,375.00 |
|
|
|
|
|
| total per annum |
|
|
|
$1,049,375.00 |
|
|
|
|
|
| total per visitor |
|
|
|
$29.98 |
Discounting: Time, risk, uncertainty
Readings:
McAllister, D.M., 1980.
Evaluation
in Environmental Planning. Cambridge, MA: MIT. Chapter 7, 105-123.
TIme and discounting
I want it now -- people will pay
more to have something now than they will to have the same at some time
in the future.
A bird in the hand is worth two in the
bush -- people are willing to sacrifice gains in the future in order
to have benefits now.
Discount and interest
Discount rate -- the perceived
percentage annual loss in value of future benefits -- see table 7.2 in
McAllister.
Interest rate -- the percentage
annual growth of a present day investment -- see table 7.1 in McAllister.
Picking appropriate rates
The process is quite subjective and open to
criticism.
Is discounting appropriate for environmental
evaluation?
a $10 benefit at 4% discount rate
--
-
50 yrs hence has a present value of $1.41
-
100 yrs hence has a present value of $0.20
a $10 benefit at 10% discount rate
--
-
50 yrs hence has a present value of $0.09
-
100 yrs hence has a present value of $0.001
Therefore it is common in cost-benefit analysis
to ignore impacts beyond 50yrs.
Risk and uncertainty
Sometimes economic impacts cannot be
predicted precisely -- if the probability can be estimated they are
termed "risks", if not "uncertainty".
Risks -- include flooding, forest
fires, earthquakes -- where expected damages can be estimated if the probability
can be estimated.
Uncertainty -- damages can only
be guessed subjectively if the probability of an impact cannot be estimated.
Deciding on decision criteria
Accept-reject
Ranking of alternatives
but ... it is rare for all other
factors than economic costs and benefits to be equal. If they are not then
the comparison is invalid.
however ... monetized values have
great benefit in clarifying issues in the minds of people charged with
complex decisions.
Cost-benefit critique
Typically CBA is used for large-scale
public projects.
Ironically, large-scale public projects
are frequently just that because it is acknowledged that the private market
fails to address the full range of market and non-market values in land
resources.
-
private industry may not address the pollution
and scenic impacts of a new factory on the surrounding community.
-
foresters may not address the stream biota
impacts of logging in a fragile watershed.
So a key problem in the use of CBA
for land resource evaluation is the need to infer market values from observation
of non-market values.
Benefits of Cost-Benefit Analysis:
-
Based on long development of theory, methods
and testing.
-
Attempts to reflect the values of all people
as represented in the marketplace.
-
Uses units understandable to a wide range
of people.
-
There are many case studies available to guide
new evaluations.
Cost-benefit critique
-
willingness-to-pay violates the principle
of equality since the ability to pay is not equal for all, especially the
poor, young and old.
-
the technical procedures used to value non-market
goods are frequently too complex for decision makers and the public to
understand, so that values must be taken at face-value.
-
the accuracy of monetized environmental impacts
is suspect because of the absence of information on willingness-to-pay
or the failure to address all the salient values.
----------
-
some types of environmental value (e.g., noise
or quiet) have rarely been adequately valued, others (e.g., scenic beauty)
remain at the least very difficult to value.
-
monetization of some values (e.g., converting
accident statistics or health impacts of pollution to $ losses) is common
but inappropriate and confusing.
-
some values should not be monetized since
they are rarely, if ever, considered as economic values (e.g., biodiversity,
preservation for future generations.
----------
-
the cost of conducting Cost-Benefit Analyses
can be very high since some of the values are so elusive.
-
the process of discounting, central in Cost-Benefit
Analysis procedures, places low importance on long-term benefits or damages,
and can be especially damaging to the case against resource depletion.
-
Cost-Benefit Analyses conducted by economists
may under-report non-market impacts -- people with strong humanistic and
environmental values place less emphasis on high incomes and may have lower
ability-to-pay.
Conclusion:
-
economic factors are clearly an important
part of many decisions.
-
to focus on economic values alone is frequently
a gross over-simplification of the domain in which society should make
decisions.
-
politicians and political processes are frequently
driven to over-simplify issues in order to move decision-making along.
Reading for next Monday:
Porteous, J. Douglas, 1996.
Environmental
Aesthetics: Ideas, Politics, and Planning. New York:
Routledge. Introduction, pp3-41. Chapter 3, Experimentalists.
pp113-147.
Practicals 3-5 (completion)
Brief presentation of evaluations/due date--
Wednesday, October 13, 10:30am, Room
325,
using WWW via video projector.
Describe:
-
the context of your evaluation,
-
sources of information and assumptions used,
-
your findings, and
the implications/recommendations that
emerged.
Modified: 24 October 1999, Brian Orland
