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ENVIRONMENT, NATURAL SYSTEMS, and DEVELOPMENT 1'29-- ) ENVIRONMENT, NATURAL SYSTEMS, and DEVELOPMENT Ii t.' . , '<)" ENVIRONMENT, NATURAL SYSTEMS, and DEVELOPMENT An Economic Valuation Guide Maynard M. Hufschmidt David E.James Anton D.Meister Blair T. Bower John A. Dixon THE JOHNS HOPKINS UNIVERSITY PRESS Baltimore and London Copyright © 1983 by East-West Center, East-West Environment and Policy Institute All rights reserved Printed in the United States of America The Johns Hopkins University Press, Baltimore, Maryland 21218 The Johns Hopkins Press Ltd., London Library of Congress Cataloging in Publication Data Main entry under title: Environment, natural systems, and development. Prepared by a team of experts assembled at the East-West Environment and Policy Institute. Bibliography: pp. 321-27 Includes index. I. Environmental po!icy--Cost effectiveness-Addresses, essays, lectures. 2. Economic development projects- Cost effectiveness-Addresses, essays, icctures. I. Hufschniidt, Maynard M. II. East-West Environment and Policy Institute (Honolulu, Hawaii) HC79.E5E573 1983 363.7'05 82-17237 ISBN 0-8018-2930-5 ISBN 0-8018-2931-3 (pbk.) Contents List of Figures xi List of Tables xv Foreword xix Prefice xvi Chapter 1. INTRODUCTION Benefit-Cost Analysis 2 History 3 Recent Applications to Natural Systems and Environmental Qualit' 4 Applicability in Developing Countries 5 Conceptual Framework 7 Organization of the Guide 8 References 10 Chapter 2. INSTITUTIONAL AND PLANNING CONTEXT 12 Multiple Objective Nature of Decisions 13 Planning and Decision-making Context 13 Levels of Planning 14 The Planning and Decision-making Process 16 Context of the Problems 18 Organizational and Administrative Structure 20 ExternalAid Organizations 22 Reference 23 V vi Contents Chapter 3. PRINCIPLES AND ENVIRONMENTAL QUALITY EXTENSIONS OF BENEFIT-COST ANALYSIS 24 The Purpose of Benefit-Cost Analysis 24 Sources of Values 25 Economic Fficienc , and Monetar Values 25 Individual Economic Welfaire 26 Social Economic Wefi're 28 Investment Planning and Decisions 34 Levels ohfInvestnent Phnninv 34 Project Costs and Be,lits 35 Investment Criteria 37 Extension of Bcnefit-Cost Analysis to Environmental Quality 43 Econotic-EnvirontentInteractionsand Government Policy 43 Estimation qf Damaiges to the Environment 46 Incorporating Environmenud Costs and Ben fits in Project Design and Appraisal 49 Multiple-Activit* Development Prograns 53 Environmental Protection Policies and Programs 53 Applicttion ofBenefit-Cot AnalYsis to Natural Resources 56 Uncertainty and Irreversibilities 57 Economic Valuation Techniques 5N Benefit Valuation 58 Valuation of Costs 62 Cost-Effectivene's Analysis 62 Classification (YValuation Techniques 65 General Conclusions 65 Appendix 68 Compensated Demand-Compensating Variation 68 Compensated Denand-Equivalent Variation 69 Comparison of Marshallian and Hicksian Demand Curves 70 References 71 Chapter 4. ANALYZING ACTIVITIES 73 Key Definitions and Concepts 73 Nonproduct Outputs and Residials 73 Interrelationships among Residuials 74 Activities that Generate Resihals 76 Contents vii Analyzing Activities 80 Approachesfor Analyzing Activities 81 Some Examples of Activity Analysis 84 Analyzing Concentr,,tedActivities 85 Analwing DispersedActivities: Agricultural Activities 93 Analyzing Dispersed Activities: ForestManagement 97 Analyzing Linked Activities 107 Concluding Comment 112 References 112 Chapter 5. ANALYZING EFFECTS ON NATURAL SYSTEMS AND RECEPTORS 114 Some Problems in Analyzing Effects 118 Types of Models for Analyzing Effects 120 ClassificationAccording to MathematicalRigor 120 Classif ation According to Natural Systems and Environmental Media 123 Classification According to Effects Being Estimated 124 Approaches to Estimating Effects 124 StatisticalApproach 126 Conservation-of-Mass-and-Energy. Approach 129 Choosing a Model or Set of Models 131 Examples of Estimating Effects on Natural Systems 136 Effects of AgriculturalActivities on Natural S*vstemns: An E.rample of the StatisticalApproach 136 Effects of Forest ManagenentActivities on NaturalSystems: An Example of the StatisticalApproach 144 Effects of Multiple Dischargeson an Atmospheric Sistem: An Exanple of the Conservation-of-Mass-and-Energy Approach 149 Some Problems in Estimating Effects on Natural Systems 155 Compf .xitv ?f Natural-Systens Models 155 Calibrationand Verification 156 Background Concentrationsof Residuals 157 Links between Models of NaturalSystems and the Analysis of Activities 158 InterpretingResults (?f Applying Models 158 Approaches for Estimating Effects on Receptors 159 StatisticalApproach: Rudimentary 159 viii Contents Statistical Approach. Regression Analysis 161 Conservation-of-Mass-ancd-Eier1gyApproach 166 Concluding Comments 167 References 168 Chapter 6. ENVIRONMENTAL QUALITY VALUATION FROM THE BENEFIT SIDE 170 Valuing Benefits-A Brief Summary 170 Market Value oi Productivity Approaches 172 Theoretical Basis 172 A Case Study." Soil Conservat;on in Nepal 175 The Human Capital, or Foregone Earnings, Approach 183 Opportunity-Cost Approach /91 Surrogate Market Approaches 195 Marketed Goods and Services as Environmental Surrogates 195 Property Value Approach 196 Other Land Value Approaches 209 The Wage Differential Approach 213 The Travel-Cost Approach 216 Litigation and Compensation 232 Survy-Based Valuation Techniques 232 Basic Theory 234 The Bidding-Gane, Approach 234 Trade-Off Gaines 243 Costless Choice 246 Priority Evaluator Technique 249 Delphi Techniques 251 Potential Biases and Shortcomings in Survey-based Valuation Techniques 252 References 254 Chapter 7. ENVIRONMENTAL QUALITY VALUATION FROM THE COST SIDE 261 Cost Analysis Techniques 261 The Preventive Expenditures Methods 262 The Replacement- Cost Approach 266 The "Shadow-Project' Approach 267 Cost-effectiveness Analysis 272 Cost-effective Measures to Reduce Discharges froin Individual Plants 273 Contents ix A RegionalAmbient Air Quality, Example 278 Effects on Humans as Receptors: Water-borne Diseases 280 References 285 Chapter 8. MULTIACTIVITY ECONOMIC-ENVIRON MENTAL QUALITY MODELS 286 Input-Output Models 287 Basic Features of Input-Output Models 287 Constructionof an Input-Output Model 289 An Australian Input-Output Emissions Model 295 Other Studies 298 Some Limitationso Input-Output Models 299 Linear-Programming Models of Environmental Quality Management 300 Linear-Programming Theoryv 301 Abating Pollution through Structural Changes 305 An Application of Linear Programming: Air Quality Management in the Rijnmnond Region, Netherlands 308 Redt cing Discharges with Technical Means 310 Mixed Integer-Linear Programming 312 Some Limnitations of Linear Programming 314 Other Models 315 Appendix 317 Matrix Formulation vf Input-Output Model 317 References 31 Bibliography of KeY References 321 Index 329 List of Figures 1.1. Valuation of Natural-Systems and Environmental Quality Effects and of Environmental Quality Management Measures 8 2.1. Illustrative Levels of Planning and Derision Making in a Developing Country 15 2.2. Environmental Quality and Natural-Systems Aspects of a Project or Program Planning and Decision-making Process 17 2.3. The Problem Context for Natural-Systems and Environmental Quality Analysis 19 2.4. Typical Organizational Structure of a National Government Showing Locus of Environmental Quality and Natural-Resources Activities 21 3.1. Typical Total Utility Function of an Individual 26 3.2. Typical Marginal Utility Function of an Individual 27 3.3. Individual Demand Curve for Good X 28 3.4. Market Demand Curve for Good X 29 3.5. Market Supply Curve for Good X 30 3.6. Optimal Level of Production and Consumption of Good X 31 3.7. Changes in Net Benefits 32 3.8. Changes ia Net Benefits with New Technology 32 3.9. Project Costs and Benefits over Time 37 3.10. Net-Benefit Streams for Four Investment Alternatives 40 3.11. Net Present Value as a Function of Discount Rate 41 3.12. Project Scale with and without Funding Constraints 43 3.13. Sources of Economic Welfare, including Environmental Services 44 3.14. Hypothetical Damage Cost Curve for SO, 47 3.15. Estimation of Social Damage Cost 48 xi xii List of Figures 3.16. Examination of Benefits and Costs of a Typical Development Project 51 3.17. Economic-Environmental Quality Input-Output Model 52 3.18. The Optimal Level of Emissions 54 3.19. Optimal Level of Pollution Abatement 56 3.20. Individual Demand Curve for Recreation in a Natural Environment 60 3.21. Demand for Environmental Amenity as a Public Good 61 3.22. Cost of Emission Controls as a Function of Degree of Abatement 63 A3.1. Compensating Variation Measured by Ilicks-conipensated Demand Curve 68 A3.2. Equivalent Variation Measured by Hicks-compensated Demand Curve 70 4.1. Definition of Residuals Generation and Discharge 75 4.2. Interrelationships among Forms of Residuals 76 4.3. Flow Diagram of a Vegetable Cannery 77 4.4. Hypothetical Cost Curve for Modification of Nonproduct Material That Can Be Used In-Plant 86 4.5. Net Annual Cost of Particulate Modification from a Recovery Furnace: Integrated Kraft Mill 89 4.6. Generalized Diagram of Agricultural Activities 95 4.7. Typical Outputs from a Forest Management Area 98 4.8. Relationship between Timber Output and Recreation Use 100 4.9. Increases in Annual Water Yield after 82% Clear-cut Logging in Needle Branch Watershed, Western Oregon 102 4.10. Increases in Annual Water Yield after Road-building and Patch-Cut Logging in Watershed 3, H. J. Andrews Experimental Forest, Western Oregon /03 4.11. Soil Surface Conditions following Tractor, Iligh-Lead, Skyline, and Balloon Logging in
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