Topics Today 102808

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Topics Today (10/28/08)

• Case study on CBA and endangered species
  protection.
• Safe minimum standard.
• Read 8 from reading list for Thursday.
• Homework 5 is due today.
• Exam 2 is Thursday, November 6.
• Revised office hours for tomorrow (10/29)
  300-345pm.

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Endangered Species Protection

• How many species exist?
• Worldwide there is an estimated 14 million
  species, though this may vary between 3 million
  to 100 million
• In the U.S., there are in excess of 200,000
  species known to exist, many of these are insects
  and fungi.

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Endangered Species Protection

• Condition of U.S. species
• In the U.S., of the 20,897 known species of
  plants and animals, there are
• 70 known extinctions.
• 170 are considered possibly extinct.
• 1,385 are critically imperiled.
• 1,737 are imperiled.
• 3,338 are considered vulnerable to extinction.
• Roughly 1/3 of native U.S. plants and animals is
  at risk of extinction.

Source Stein, B.A. 2001. A Fragile Cornucopia
Assessing the Status of U.S. Biodiversity.
Environment, 43(7) 11-22.
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Endangered Species Protection

• U.S. Policy
• Endangered Species Act
• Purpose of the act to provide a means whereby
  the ecosystems upon which endangered species and
  threatened species depend may be conserved
• Very broad and powerful act.
• Prohibits the take of endangered species.
• Economic factors not taken into consideration
  during listing.
• Economic factors are taken into consideration
  when designating critical habitat.

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Endangered Species Protection

• Challenges with ESA
• Two types of takings.
• Taking a species.
• ESA forbids the harming, killing, or harassing of
  endangered / threatened species.
• Habitat modification can be considered a taking.
• Taking private property.
• The taking of private property is forbidden
  under the 5th amendment of the U.S. Constitution.
• Regulations that prevent economic activity can be
  considered a taking (e.g. Supreme Courts Lucas
  decision).

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Endangered Species Protection

• Challenges with ESA (cont.)
• 90 of listed species are found on private land.
• Benefits of protecting species accrue to entire
  nation.
• Public goods.
• Potential non-use values.
• Costs of protecting species accrue to landowners.
• Compensation typically not offered to landowners
  who have to alter land use (e.g. stop cutting
  timber).

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Endangered Species Protection

• Challenges with ESA (cont.)
• Intention of ESA is to save all species.
• Are all species worth the same from an economic
  standpoint?
• Budgets are limited how to pick which species
  to save?

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CBA and Spotted Owls

• Spotted owls live mostly in old-growth forests in
  the Pacific Northwest.
• Little old-growth left in the PNW due to
  extensive timber harvesting.
• Q Is it more efficient to use the remaining
  old-growth for species preservation or wood
  products production?

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CBA and Spotted Owls

• This case study illustrates
• The role of non-market valuation.
• The problem of defining the relevant population
  of gainers and losers.
• The role of jobs in a CBA.
• The distributional consequences of a policy.

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CBA and Spotted Owls

• Project / Policy Description
• What is the policy?
• Reduce annual timber harvests on Forest Service
  and BLM lands by 2.4 billion board feet.
• Whose welfare?
• OR and WA
• The U.S. as a whole.
• Time Period?
• Short run (0 10 years)
• Long run (some period beyond ten years).

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CBA and Spotted Owls

• Identify physical impacts
• Costs
• Timber revenues that would have been captured by
  the public agencies (market good).
• Job losses (market good).
• Transitional costs such as moving (market good)
  and non-financial costs related to loss of
  community (non-market good).

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CBA Issues and Pitfalls counting jobs

• Cost-Benefit Analysis and Regulatory Reform An
  Assessment of the Science and the Art
• Raymond J. Kopp, Alan J. Krupnick and Michael
  Toman, Discussion Paper 97-19, January 1997,
  Resources for the Future
• A particularly nettlesome issue in CBA is the
  treatment of impacts on employment and local
  economic activity. Many analyses of regulations
  have purported to calculate how many jobs a
  regulation "creates." Closer scrutiny of those
  studies reveals that they often treat the supply
  of labor services as unlimited, so increases in
  employment as a consequence of a regulation have
  no opportunity cost in terms of diversion of
  productive activity from other parts of the
  economy. Economists generally view the
  job-creating potential of regulation with
  considerable skepticism, although a regulation
  can increase the use of unemployed or
  underemployed workers. In the absence of evidence
  that such conditions prevail, employment effects
  should be noted but not counted as net benefits
  of regulation.

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CBA and Spotted Owls

• Identify physical impacts (cont.)
• Benefits
• Recreational use
• Current recreation (non-market good with a use
  value).
• Future recreation option value (non-market good
  with a non-use value).
• Existence of an endangered species (non-market,
  non-use value).
• Bequest value of passing down species for future
  generations (non-market, non-use value).

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CBA and Spotted Owls

• Valuing physical impacts
• Benefits CVM was method.
• 1,200 surveys were sent out to a random sample of
  Washington state residents.
• Surveys describe the spotted owl, its habitat,
  its status as a threatened species, and the loss
  of timber revenues associated with preservation.
• Respondents are asked questions about their
  willingness to pay to ensure Spotted Owls
  survival.
• The average willingness to pay was 49.72 per
  household per year.

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CBA and Spotted Owls

• Valuing physical impacts
• Extrapolation to the population
• Results statistically adjusted by demographics.
• Assumed that peoples WTP declines by 10 for
  every 1000 miles from Portland.

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CBA and Spotted Owls

• Valuing physical impacts
• Extrapolation to the population (cont.)
• Why should the rest of the U.S. be included?
• The public goods nature of the benefits
  non-excludable.
• Non-use value.
• Why should WTP decline with distance?
• Non-use values may not necessarily decline
  because they are non-use.
• CVM values often pick up recreation values as
  well, which are much more likely to decline with
  distance.

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CBA and Spotted Owls

• Valuing physical impacts
• Costs
• Foregone timber revenues
• Reduction of 2.4 billion board feet.
• Two price scenarios are considered (sensitivity
  analysis)
• Prices stay constant at current levels.
• Prices rise over time.
• 497.0 to 762.4 million per year for the long
  run (table 2).

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CBA and Spotted Owls

• Valuing physical impacts
• Costs (cont.)
• Job Losses
• Average annual wage in the affected industries
  was 17,640.
• Predicted job losses were 13,272 by 1995 and
  28,165 by 2000.
• Range of value of job losses 234.1 - 496.8
  million.
• In the long run, job losses were assumed zero,
  since workers are assumed to find a new job at
  same wage. Reasonable assumption?

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CBA and Spotted Owls

• Net benefits per year (in millions)

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CBA and Spotted Owls

• Distributional consequences of a policy
• People outside of OR, WA, and CA get benefits but
  do not bear any of the costs.
• Distribution problems occur because benefits from
  Spotted Owl protection are public goods.
• How to achieve a Pareto Improvement? Tax the
  gainers and use the tax revenues to pay the
  affected workers.

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Endangered Species Protection

• Q Who has the property right to use land?
• Does government have the right to regulate
  private land use to provide public goods?
• Do landowners have the right to use their land as
  they see fit?

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Economics and Endangered Species Protection

• Why does economics matter for endangered species
  protection?
• human behavior generally, and economic
  parameters in particular, help determine the risk
  to a species. (p. 1258).
• Habitat loss is generally driven by human
  decisions.
• Where is habitat likely to be most threatened?
• Land is traded in a market.
• Requires understanding local land markets and
  broader conditions (e.g. interest rates).
• How do landowners respond to conservation
  efforts?

Shogren et al. (1999). Why economics matters for
endangered species protection. Conservattion
Biology 13(6) 1257-1261.
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Economics and Endangered Species Protection

• Why does economics matter for endangered species
  protection?
• in a world of scarce resources, the
  opportunity cost of species protection in terms
  of the reduced resources for other worthwhile
  causes must be taken into account in decision
  making. (p. 1259).
• Suppose a conservation group wants to save two
  species in two different regions, but only has
  the budget to save one?
• How can this decision be made?
• Given a species conservation goal, what is the
  least-cost method of achieving that goal?

Shogren et al. (1999). Why economics matters for
endangered species protection. Conservattion
Biology 13(6) 1257-1261.
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Economics and Endangered Species Protection

• Why does economics matter for endangered species
  protection?
• economic incentives are critical to shaping
  human behavior and consequently to the recovery
  of the species. (p. 1259).
• Private landowner incentives Keep biologists off
  land, minimize possibility of learning about
  species.
• Destroy habitat (e.g. shoot, shovel, and
  shutup).
• Ex/ Boiling Springs, NC (2006)
• Feb 06 U.S. Fish Wildlife put town on notice
  that development was harming Red-Cockaded
  Woodpeckers.
• Feb Sep. 06 368 logging permits issued.
• No incentives to improve habitat.
• What about paying landowners to improve habitat?

Shogren et al. (1999). Why economics matters for
endangered species protection. Conservattion
Biology 13(6) 1257-1261.
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Irreversible Environmental Losses

• Environmental degradation and irreversible
  losses?
• Ex/ Species extinction
• Once a species is extinct, their genetic material
  is forever lost.
• Is there the possibility that the lost species
  could provide a cure to some future disease that
  may or may not materialize?

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Safe Minimum Standard

• An alternative approach to policy analysis is the
  Safe Minimum Standard (SMS).
• If future benefits are truly unknown, cant make
  decisions based on cost-benefit standards.
• SMS Decision rule Unique resources should be
  preserved at levels that prevent their
  irreversible depletion, unless the costs of doing
  so are unacceptably high.

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Safe Minimum Standard

• Suppose society is faced with a decision to
  develop a dam on a river.
• If the river is dammed, this will drive a
  particular plant species to extinction which may
  or may not provide a cure for a disease which may
  or may not develop.
• Notation
• Bdev benefits from development (quantifiable)
• Bpres benefits from preservation (quantifiable)
• Cdis possible future costs of the disease (not
  quantifiable)
• Cdis Bdev Bpres

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Safe Minimum Standard

• Societys regrets matrix

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Safe Minimum Standard

• Societys regrets matrix

Gray shading represents societys maximum regrets
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Safe Minimum Standard

• SMS rule Minimize the cost of being wrong.
• What are the maximum costs of being wrong?
• If the dam is developed, maximum cost occurs when
  the disease materializes and the extinct species
  could have provided a cure.
• If the river is preserved, maximum cost occurs
  when
• The disease materializes and the preserved
  species fails to provide a cure.
• The disease fails to materialize.

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Safe Minimum Standard

• Society will choose to preserve the resource if
• (Bdev Cdis) (Bpres)
• -Cdis
• Cdis 2(Bdev Bpres)
• SMS rule When faced with a potentially
  irreversible loss, society should preserve as
  long as the opportunity costs of preservation are
  not too high.

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Safe Minimum Standard

• Endangered Species Act as SMS
• Preference is always towards preventing
  extinction.
• Extinction can be allowed if costs are
  extraordinarily high.
• Endangered species committee (a.k.a. the god
  squad) can grant exemptions.
• Several cabinet secretaries and the chair of the
  council on Environmental Quality.