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A New Strategy for Benefits Transfer

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Abstract

This paper calls for re-focusing the analysis of existing results to evaluate whether there are stable ratios of use value to total willingness to pay for improvements in different types of environmental resources. The objective is to develop a screening tool to determine if decisions about the assumed number of users versus nonusers of a resource are likely to be important to aggregate benefit measures for changes in the amount or quality of different environmental resources. Four sets of applications involving different aspects of water resources are considered: nutrients in the Neuse River affecting the Albemarle-Pamlico Estuary; nutrients in the Chesapeake Bay; whitewater rafting on the Colorado River; and the Deepwater Oil Spill in the Gulf of Mexico. The findings suggest a need to add the evaluation of these ratios to the research agenda in benefits transfer.

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Notes

  1. See Johnston et al. (2015) for a guide to current practices in benefit transfer and Carson et al. (2014) for discussion of the importance of incentive compatibility and consequentiality for stated preference surveys.

  2. We have excluded the cases where changes in mortality risk play an important role of the aggregate benefit measures. For regulations involving the criteria air pollutants, atmospheric diffusion models usually serve to define the populations affected by any proposed rules. These models describe the locations where reductions in emissions from point sources change the ambient concentrations of the air pollutants from the baseline levels.

  3. Banzhaf’s (2005) proposal to integrate changes in the amount of local public goods into cost of living indexes is the earliest effort we know of to connect these two lines of research.

  4. See Johnston et al. (2015), Johnston et al. (2021), and the special issue of Environmental and Resource Economics in 2018 entitled “Benefits Transfer: Current Practice and Future Prospects” as examples.

  5. Our example is not an arbitrary hypothetical case. See Bingham and Kinnell (3) for discussion of the role of benefit cost analysis in evaluating restrictions associated with EPA’s 316(b) rule. See also Kopp and Smith (1989) for a specific example in the context of an early natural resource damage assessment.

  6. The average price is a weighted average, based on the amount of each of the homogenous commodities purchased. With homogeneous commodities, the assumption of complete information and rational behavior on the part of consumers would imply that within a market the same commodity should sell for the same price. See Eckard (2004) for an interesting discussion of price dispersion and efforts to measure it.

  7. Common tests include the circularity, time reversal, product, and factor reversal tests. See Balk (2008) pp.78-87 for definitions and discussion of each.

  8. There are certainly models extending the Tiebout (1956) logic and assume people can move to different communities to “acquire” different amounts of local public goods such as public education and local air quality. We are assuming these represent long-run decisions and are not part of our analysis here.

  9. It is certainly possible that the higher level of quality would imply a higher choke price. In this case assume \({p}_{x}^{*}\) corresponds to the highest of the two choke prices.

  10. This judgment does not mean there may not also be non-use values in these cases. For the health related benefits of conventional air pollutants there are usually assumed to be small.

  11. The Phaneuf study consider all 58 watersheds in North Carolina but focuses primary analysis on nutrient pollution in these areas, recognizing the potential for substitution in these other watersheds.

  12. The travel cost associated with vehicle related expenses was measured at $.20 per mile. Time costs were assumed to equal the average hourly income. Trip time assumed a 50-mph speed limit.

  13. This result was derived by computing a per trip measure of consumer surplus from the model and then adjusting for the number of trips associated with current quality levels (mean = 2.39) versus stated trips with improved quality (3.46).

  14. The NSRE was a national effort undertaken by EPA. 16,000 observations for the nation as a whole were in the survey. It was stratified to assure adequate samples for each state.

  15. There is not sufficient detail in the Phaneuf (2002) paper to determine exactly how wage rates were computed. It would appear that income per hour was used. Distance was measured to the center point of each watershed from each respondent’s reported home ZIP Code. Distance included round-trip mileage and travel time likely estimated with PC Miler (a software package used for these types of calculations).

  16. The IWI index is based on ranking watersheds by current condition and vulnerability. The technical measures used to characterize each of the four indexes were based on the percentage of readings in a watershed between 1990 and 1995 that fall outside the current EPA criteria for that substance.

  17. The composite-Neuse watershed has 4 of the 58 watersheds including: the Upper Neuse, the Middle Neuse, the Lower Neuse, and the Conteninea. The Tar-Pamlico includes 5 watersheds, including: the Upper Tar, Fishing, Lower Tar, Pamlico, and Pamlico Sound.

  18. This scenario would actually be a physical impossibility given the interconnections of the watersheds. Given the definitions for the site alternatives in Phaneuf’s random utility model, we simply use it to assess the relative impact of potential substitutes.

  19. The random utility model does not allow the estimates to be simply added to develop one’s own composite estimate (see Eq. 6 in the paper). As a result, any selection represents a compromise. The selection for our example is model R3. This model’s results fall in the middle of the other alternatives.

  20. The plans followed proposals that were current and under consideration by the North Carolina legislature at the time. The difference in the plans involved how the tax revenue would be used. Under the enforcement plan, the state would use the extra tax revenue to hire more inspectors for better monitoring and enforcement of regulations on the farms. Under the cost share proposal, the plan would also hire more inspectors but farmers and taxpayers would share the cost.

  21. The interview was conducted with the same individual who had answered the first plan during the time between the interviews a booklet describing the plan was sent to each individual.

  22. The specific values were $10, $25, $50, $75, $100, $125, $375, and $750 per year. This amount was described to be in addition to the amount an individual already paid in state income taxes. It was also suggested the payment would be required each year to maintain the program.

  23. Some studies have argued people have difficulty reporting anticipated uses under new condtions and these may be inaccurate measures of their likely actual behavior. Grijalva et al. (2002) also find actual and stated trip behavior are consistent. We use that stated trips along with averages from the National Survey.

  24. The survey used a stated choice experiment framework where each respondent selected a program with different attributes including the annual cost associated with each alternative.

  25. The annual cost alternatives were $20, $40, $60, $180, $250, and $500. Table 1 in their paper provides the details for the variations in all the attributes in their choice experiment.

  26. The authors reported that six additional surveys were returned after the data analysis was completed. They were included in computing the response rates but are not part of the sample used all the analysis reported. See footnote #1 page 77 of the Bishop et al. (1987) report.

  27. The actual text used the number of the question where the total was reported rather than the phrase “the previous question”.

  28. The framework derives the equivalent of a per trip measure of consumer surplus.

  29. The low threshold for the low flow condition was defined using the bound defining the 25th percentile for the conditions experienced by those responding to the survey and corresponds to conditions less than or equal to 23,000cfs. The middle flow cases are for flows greater than 23,000 and less than or equal to 32,000. The high flow cases are greater than 32,000.

  30. For the national sample another version of the questionnaire was also considered. The version with seasonally adjusted steady flow included further recognition that the power costs for individuals residing in the marketing area would be affected by the policy.

  31. See Welsh et al. (1995) Table 5–32, p.5–54.

  32. We assume this estimate would approximate total willingness-to-pay by users for the trip. The stated choice question asks about additional amounts users would pay, recognizing the expenditures they made for the trip. This framework implicitly treats some decisions as quasi fixed. The ex-ante total willingness-to-pay for a trip would allow all the features of the trip to be decided together. We assume in this situation there would not be appreciably differences between the two conceptions of the total willingness-to-pay for users.

  33. The use values are adjusted to 1994$ using the CPI in developing the ratio of use to total value. More specifically the predicted consumer surplus and estimate for total required expenses are adjusted by 1.38 (ratio of the CPI in 1994 to that of 1987) to add to the present value of the estimated non-use value which was in 1994 dollars.

  34. Appendix A provides the text of the questions used to describe the injuries for the CV survey used to estimate the total willingness to pay. These were intended to elicit a “one time” payment for a plan to prevent one future oil spill that would cause the same injuries as the original spill in the absence of having that plan. This message was the goal of the description in the survey instrument.

    To use the estimates of total willingness to pay for the plan there are many assumptions that must be made. Some of them would include the following:

    • Survey respondents believe that just one spill would occur without the plan and the injuries would be exactly like what was described;

    • Households display risk neutrality since the plan is interpreted as a form of insurance and their responses are used to estimate a lower bound mean for what was interpreted as the expected value for each respondent places on avoiding the injuries;

    • The plan works;

    • Despite the 15 year time horizon described as the interval over which another spill could arise the analysis models the decision process as if it was a choice made within a consistent static model of consumer behavior;

    • The question framing meets incentive compatibility and consequentiality conditions, so the responses can be treated as “truthful” and reliable;

  35. We use the CPI for the first half of 2019 (254.512 in 1982 – 1984 dollars).

  36. The original study reported $153 for the large injury and for the small injury $136 in 2013 dollars Our adjustment to 2019 used the annual average CPI in 2013 (232.957) and the semi-annual value in 2019 (254.412).

  37. There is a separate issue in the comparison of a one-time payment with values for a single season measured per recreation day for distinct time intervals. This analysis assumes the goal of suggesting one more spill implies the one-time payment is the expected value for one spill. As a result, it assumes the relevant use comparison is one season’s estimates for use values. The distinction in treatment of losses –a case of full loss of 1.5 days versus weighting the losses by the fraction of lost trips is intended to illustrate two different ways the expected value concept could be interpreted.

  38. The CPI adjustment uses the 254.412 for 2019 and 237.017 for 2015. The implied 2019 value for a day of beach recreation in period one was $39.96 and for period two was $43.09.

  39. The North Gulf had 45% of the total use and the Peninsula of Florida 55% of that use. The North Gulf areas experienced a 45.5% loss in the first period and the Peninsula a 22.9% loss in that period. This summary is taken from Table 5 of English et al. (2018). The average loss in use for the first period with this method is 20.5%. The areas were defined as: “…the North Gulf (from Grand Isle, Louisiana through Apalachicola)and (2) the Florida Peninsula (from Apalachicola through the Florida Keys)” p.37 For the second period only the North Gulf was impacted.

  40. This measure uses the losses in each period and location to construct a weighted measure of the amount lost for period one. Since the loss is confined to one area period two estimate uses the loss in that area and the per trip value for that time span adjusted to 2019$.

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Acknowledgements

Thanks are due two anonymous reviewers for exceptionally careful and detailed comments on an earlier version of this paper. They helped us to focus on the main message of this paper.

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Authors and Affiliations

  1. Arizona State University, 632 E. Kings Ave, Scottsdale, AZ, 85254, USA

    V Kerry Smith

  2. Texas A&M University, College Station, USA

    W. Douglass Shaw

  3. Private Consultant, Longmont, USA

    Michael P. Welsh

  4. Abt Associates, Boulder, USA

    Chris Dixon & Lisa Mc Donald

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  1. V Kerry Smith
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Correspondence to V Kerry Smith.

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Smith, V.K., Shaw, W.D., Welsh, M.P. et al. A New Strategy for Benefits Transfer. Environ Resource Econ 81, 155–178 (2022). https://doi.org/10.1007/s10640-021-00623-4

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