Valuation Philosophy3.2
5. GROSS WILLINGNESS TO PAY, COST, AND NET BENEFITS
It is now time to begin to answer one of the first questions posed by this chapter: is the additional employment created by a resource management action a benefit or a cost? Often times one reads in the newspaper that a new power plant, factory, or relaxation of environmental regulation will
“create” a certain number of jobs. The same newspaper article might quote a timber industry official who states that preserving an area as endangered species habitat results in society foregoing trees that are worth one million dollars at the lumber yard. Is this an accurate statement of the opportunity cost of designating the area as endangered species habitat? We now turn to an example that will allow us to answer these questions.
Table 7-3 presents data on two resource uses that could take place on a specific parcel of land that is currently a wetland. One of the current uses of the wetland is as a habitat for waterfowl, which allows for a "duck club"
or waterfowl hunting. Of course the wetland provides other non-market functions such as groundwater recharge, storage of storm waters from city streets, and detoxification of heavy metals from the stormwater. We will return to these non-market benefits at the end of this example. The proposed use is to drain the wetland and have livestock grazing. For this example, we assume the owner has petitioned you, as an analyst with the county, for a permit to drain the wetland for livestock grazing. The column headings relate to Gross Benefits, Cost of Production (or Expenditures), and Net Benefits. Net Benefits is equal to Gross Benefits minus the Cost of Production.
We can use Table 7-3 to answer the question about the economic effects to society from maintaining the wetland area for waterfowl hunting as compared to draining it for livestock grazing. If we keep the area as a wetland and have a waterfowl hunting operation, what does society forego?
Suppose the rancher would receive $1 per pound for the 95,000 pounds of beef raised on the drained wetland. But this is not the net value of the beef to the rancher or to society if we allow this operation. The rancher must spend $45,000 purchasing his initial cattle stock, feed supplements, veterinarian services, and labor to tend the cows and truck them to market.
The net gain to the rancher and the nation is only the difference between
what society gets ($95,000) and what it gives up ($45,000). The net benefits of $50,000 represent the gain or net income to the rancher over and above the costs. Suppose that $30,000 of the $50,000 in costs is wages paid to hire 2 workers to move the livestock from where the young calves were purchased to the pasture, move them from pasture to pasture, replenish salt licks, repair fences and truck the full grown cows to market.
Now let's examine maintaining the wetland for waterfowl hunting. For the moment, assume 200 hunters would pay $300 each year to go waterfowl hunting in this area. That is, they would pay $300 each year to have the area available for waterfowl hunting rather than go waterfowl hunting at the next best area. This yields a gross benefit of $60,000 in Table 7-3. However, the landowners incur costs of $20,000 for hiring one worker ($15,000) and materials ($5,000) each year to erect the hunting blinds at the beginning of each hunting season and then to take them down and store them each year after the season is over. Thus, the landowner receives a net income of
$40,000 a year from the waterfowl hunting operation, which is decidedly less than the livestock grazing operation.
So what is the cost to landowner and society from denying the permit to drain the wetland? It is not the $95,000, worth of beef, as the landowner and society saves $45,000 in costs from not producing the beef here. Even the net income of $50,000 is not lost, as $40,000 a year can be made in the waterfowl hunting operation and still protect the wetland and its waterfowl.
Thus the net cost to the landowner is $10,000, the difference between the
$50,000 with livestock grazing and $40,000 with the waterfowl hunting.
Correct comparison of net benefits in the "with permit" versus "without permit" scenarios identifies the opportunity cost of protecting the wetland and its other non-market ecosystem services, such as groundwater recharge and stormwater retention, as $10,000, not $95,000 worth of beef or even
$50,000 of lost income, as there was another economically viable activity (although certainly not as profitable to the landowner). Thus protection of the wetland and the other ecosystem services provided by the wetland would have to be worth at least $10,000 each year to make this an economically efficient decision to society.
But what about the differences in wages paid and employment, you might ask? If the wetland was drained for livestock grazing, two workers would have been employed, while with waterfowl hunting only one is. But, if there is a market demand for the beef that would have been raised on the drained wetland, and we deny the permit, another ranch will simply expand its production by the additional cows to meet that demand. If there really is a market demand for that beef, the private market will provide an incentive to ranchers to produce it. Where these additional cows are raised, the same two workers will be needed to pick up the calves, tend the cattle, and truck
them to market. Thus two more workers will be needed somewhere else, possibly in the same region. And this makes sense, since those two ranch hands that would have worked for the landowner who wishes to drain the wetland are unlikely to be unemployed for ever! If they like ranching, they will move to where the two new jobs are. If they like that specific area, one might work for the landowner at the waterfowl hunting operation, and the other would look for work elsewhere.
While some State Fish and Game agencies would like to count the amount hunters themselves spend as a benefit of hunting, it is clearly a cost.
Certainly, the expenditures by hunters on ammunition and transportation would not be lost to the economy as a whole if the wetland were drained, any more than the expenditures on feed supplements would be lost if the wetland is not drained. The ranchers expanding production of their herds will buy the same amount of feed supplements. The only way the hunter or rancher expenditures could be lost to the economy as a whole is if they went home and set fire to the money! Since people are unlikely to do this, what actually occurs is that hunters spend that money on their next most preferred activity or area if the wetland is drained.
To see how decisions not to permit draining a wetland or building a subdivision or landfill in one particular location is just a transfer of economic activity, consider the decision on location of the Intermountain Power Project (IPP) coal fired power plant. In 1978 this large coal fired power plant was proposed at Hanksville, Utah, near Capitol Reef, Canyonlands, and Arches National Parks. Due to concern over air pollution reaching these National Parks, it was decided to build the power plant on the west side of Utah, near the town of Lyndal and far away from any National Parks. While the town of Hanksville, Utah lost all of the influx of construction workers and plant operations personnel, this was perfectly offset by the town of Lyndal's gain of the same level of construction workers and plant operations personnel. Viewed from an international, national, or state accounting stance, there was no change in employment of resources. But viewed from a narrow accounting stance of the city of Hanksville, there was a net loss. Viewed from the narrow accounting stance of the city of Lyndal, there was a net gain for them. As can be seen,both of these narrow accounting stances seriously misrepresent the change in economic social well being. The same number of workers were employed to build and operate the power plant regardless of its location.
Thus new projects in one location do not, at the national level, "create jobs"
that would not have otherwise been demanded. Market demand creates the jobs.
5.1 Assumptions about Employment of Resources
As discussed above, employment of labor, materials, diesel fuel, machines, and other factors of production represent opportunity costs to society. That is, use of a given amount of our scarce resources in one project or management action necessarily means giving up using these resources to produce output from some other project. All of this assumes reasonably full employment of resources. If, in fact, the labor employed in one project would have been otherwise unemployed for the duration of its employment in the project under study, then there is no opportunity cost of using that labor in this project. That is, use of unemployed resources does not require society to give up anything else to gain the new level of output.
Just how likely is it that the resources employed by a project would otherwise be unemployed? If the project is a long lived one, requiring labor and materials over several years (or even decades), it is very unlikely that one could rely on unemployed resources. Excess unemployment (above the background frictional levels) tends to be transitory or existing for short periods of time during recessions. Most resources, whether labor or machinery, are relatively mobile and will seek out employment rather than remain unemployed for years at a time. However, the possibility exists that, during some phase of a public project, otherwise unemployed resources would be put to work. If this is the case, the analyst can either count the economic costs of such resources at zero (or near zero, depending on the value of unemployed leisure time to workers) or, alternatively, if labor costs (measured as the opportunity cost of that labor) are included on the cost side, also count the wages paid as a project benefit. Either treatment will reflect the appropriate change in a project's net benefits.
5.2 Displaying Changes in Employment and Economic Activity
Often laws such as the National Environmental Policy Act, which governs preparation of Environmental Impact Statements, or local politicians require that the employment related to a public project or policy action be displayed. Thus, it may be appropriate to translate direct changes in project employment into total employment by including spin-off employment in support sectors of the economy induced by the project. In the same way it may be important to calculate the change in personal incomes in a given county or region that results from an increase in economic activity induced by the project. While both the induced employment and personal income generated by a project that uses fully
employed resources are a transfer, there is often interest in knowing the magnitude of those transfers.
This economic impact analysis often serves at least two useful purposes.
First and foremost, it can help local government planners plan the infrastructure of roads, schools, hospitals, housing, and parks that will be needed to accommodate the additional workers and their families. Second, politicians may desire to stimulate selected regional economies at the expense of other areas. For example, expanding job opportunities in rural areas and increasing the tax base in rural economies may be a distributional goal. Even though this rural gain may be offset by a loss of the same economic activity in an urban area, politicians may wish to stimulate rural economies to maintain their viability. The techniques for computing income and employment effects of projects via multiplier analysis (using input-output models) are discussed in Chapter 10.