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APPENDIX E Economic Concepts and Issues: Social Costs and Benefits of Beach Nourishment Projects INTRODUCTION When assessing public projects, economists are likely to ask questions about their "economic efficiency" and "distributional" implications. The latter requires an assessment of who benefits from a given project and who pays (or is otherwise detrimentally affected). The former relates to the question of whether a particular beach nourishment project is an efficient use (i.e., the highest-valued use) of the scarce resources needed for the project. Determining efficient use involves mea- suring all of the social benefits from a project and comparing them with the social costs. The social costs are, strictly speaking, the benefits foregone-that is, a measure of the benefits that could have been produced for society by using these resources in a different way. Both of these questions are of considerable prag- matic importance for beach nourishment projects. As with other publicly sponsored projects, beach nourishment undertaken by the U.S. Army Corps of Engineers (USAGE) must undergo a cost-benefit analy- sis, although the currently mandated procedures for this analysis have not kept up with recent advances in the field and fall short of those adopted by other agencies, such as the U.S. Environmental Protection Agency (EPA) and the National Oce- anic and Atmospheric Administration. As is commonly the case, recreational benefits from beach nourishment are allowed to be calculated by using either hypothetical (contingent) valuation or valuation using revealed preference (i.e., travel cost models). However, the USACE guidelines for contingent valuation surveys do not reflect appreciation for the effects of variability in format, pay- ment mechanism, and other factors that are now widely recognized (see Mitchell 251
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252 BEACHNOURISHMENT AND PROTECTION and Carson, 1989; Carson, 1991~. The USACE guidelines do not advocate refer- endum-type surveys or specify how to analyze this type of data using discrete- choice models (see Freeman, 19931. Likewise, the procedures for deriving ben- efits from "travel cost"-type studies are not designed to take into account the effect of substitutes or congestion (see Bockstael et al., 19911. The distribution of the benefits of a project is also of considerable interest. For one thing, the apparent distribution (as implied by the type of benefits gener- ated) can have an effect on the cost-sharing formula applied. Perhaps more im- portantly, the relative incidence of costs and benefits can make a project more or less politically acceptable and can influence the way the public views its success. Finally, the rules used to determine who pays for the project can affect incentives in both the private and the public sectors. Many of the economic questions that arise with respect to beach nourishment projects and their alternatives require for their resolution an assessment of their social costs and benefits (Haveman, 19691. The evaluation must include the present value of all costs and benefits during the effective life of the project, whether or not privately appropriated through markets, in order for the evaluation to be a true representation of the social costs and benefits associated with the project. Factors that need to be counted include not only "direct" or intended benefits but also externalities, whether positive or negative. The latter may in- volve "downstream" effects; effects on the ecology of the area, on local ameni- ties, on local infrastructure burden; and other considerations. The theory and methodology for conceptualizing and measuring these costs and benefits are well developed, although the sparse economics work on beach nourishment has tended to focus on a subset of these the more obvious and the ones mandated by the USACE guidelines. Under some conditions, market prices are sufficient to provide good infor- mation about opportunity costs and benefits. More complicated methods must be employed when market prices themselves are affected by the activity (e.g., more beach nourishment activity might put upward pressure on the price of sand sources). Goods and services, such as recreation, that are valued by society but not bought and sold on markets are somewhat more difficult to value. Neverthe- less, methods for doing so are well developed and have improved over the past several decades. Finally, less easily defined goods, such as environmental and community amenities, present the greatest (but not insurmountable) challenge to economic valuation. Assessing the true social costs and benefits of a project is important for a number of reasons. Most obviously, such an assessment provides criteria for deciding whether a project should be undertaken, for choosing among potential projects, and for selecting the optimal project design. Equally important, a correct assessment focuses attention on what could be considered long-term "side ef- fects" of projects providing incentives or disincentives for related activities, increasing or decreasing society's liability in the long run, improving or degrad
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APPENDIX E 253 ing the quality of life in coastal communities, and so forth. Some of these have become extremely important policy issues: What types of incentives do these projects provide that affect community land-use planning and growth manage- ment? What effect do they have on long-term social liability (through the Federal Emergency Management Agency, for example)? The realization of costs and benefits associated with a beach nourishment project is not independent of the financing of a project. Who pays for the project matters not only for the analysis of distributional implications but also because "pricing rules," especially if linked with access to benefits, will indirectly deter- mine the nature of the output and the benefiting parties. This appendix outlines the concepts of economic valuation (the definition and measurement of social costs and benefits) and discusses their application to beach nourishment. Beach nourishment projects present some difficult but not unique valuation problems. Attention is given not only to the types of immediate costs and benefits of projects but also to the longer-term incentives provided by such projects and to the effects on costs, benefits and incentives of pricing rules. ECONOMIC VALUATION OR THE ANALYSIS OF SOCIAL COSTS AND BENEFITS Cost-benefit analysis dates back to the 1930s in the United States, but the famous 1950 "Green Book" (prepared by the federal Inter-Agency River Basin Committee) was the first official publication to apply the language of conven- tional welfare economics to the analysis of federal projects and policies. By today's standards, the Green Book was technically simplistic, but it did encom- pass systematic, theoretically based definitions of costs and benefits; it made the important distinction between true "social benefits" and "economic impacts"; and it discussed the discount rate problem and the treatment of risk. The docu- ment also incorporated a recognition of costs and benefits associated with non- marketed as well as marketed goods and services. Nonmarketed goods included tangible goods that were provided at no charge, such as outdoor recreational opportunities, as well as "intangibles" such as aesthetics, quality of life and health, and other environmental factors. These are all things for which people would be willing to pay but for which there are, for institutional or practical reasons, no markets in which people can express their preferences. Thus, the precedent for considering this array of costs and benefits is long standing. The 1970s and 1980s brought important developments in both the theory and measurement of costs and benefits, as well as the adoption by several federal agencies of guidelines for using these developments to properly assess policies. Executive Order 12291, which required a regulatory impact analysis of any new regulation promulgated by a federal agency, was a stimulus for the latter. It was a particular stimulus for the development of methods for measuring nonmarket benefits by agencies such as the EPA, since the chief benefits of EPA regulations
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254 BEACH NOURISHMENT AND PROTECTION (health, recreation, and ecological goods) are not traded in markets. The federal valuation documents that emphasize nonmarket as well as market valuation are diverse and include EPA's Guidelines for Regulatory Impact Analysis, the U.S. Forest Service's Resource Planning Assessments, and the Electric Consumers Protection Act, as well as the Comprehensive Environmental Response, Com- pensation, and Liability Act of 1980 (also referred to as "CERCLA" and "Superfund") and regulations issued under the Oil Pollution Act of 1990 (P.L. 101-380) that detail how social damages are to be calculated for the purpose of establishing polluter liability in natural resource damage assessment litigation. The features of all these guidelines include a definition of the concepts of costs and benefits (as well as a distinction between these concepts and others often mistaken for "benefits"), a categorization of the types of costs and benefits that are to be considered, and recommended methods for measuring these social costs and benefits. Many of these guidelines draw on advances being made in applied welfare economics. The concepts of costs and benefits or, in the economist's jargon, the con- cept of "social value" depend fundamentally on trade-offs. Given that society's resources are scarce, whenever we choose to do something, we forfeit the oppor- tunity of doing something else. Implicit here is the notion that when we assess the costs and benefits of a public action we are doing so relative to other alternatives. The value of a project equals society's willingness to pay for the increased quantity or quality of goods, services, and amenities provided by that project. These include not just the intended benefits but also the unintended spillover benefits (i.e.. positive externalities) that might accrue. The present value of a ~~~ rim , project is the discounted stream of all future benefits provided by the project for however long the effects of the project last. This stream of future benefits is clearly an important issue in beach nourishment, as the time horizon over which benefits will accrue is especially uncertain. The costs of a project equal society's willingness to pay for what is given up as a consequence of the project. Again, these are not just the explicit costs associated with diverting scarce resources to the production of the project instead of something else. They also include implicit commitments of resources in the future and all the negative externalities that might result from the project over time. A perusal of the above illustrates that the definition of "what counts" in this social (economic) accounting scheme of costs and benefits is well developed and accepted by federal agencies and courts of law. Sorting out the nature of the costs and benefits for any particular application requires, of course, understanding all the possible effects, side effects, and feedback effects on the natural and physical environmental systems and on human behavior (including, but not restricted to, the effects on markets). Measuring the actual magnitudes of the various costs and benefits requires a greater level of sophistication and is fraught with the kinds of empirical measurement problems that plague all sciences: errors in measurement, omitted variables, functional specification, noise in the system, and so forth.
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APPENDIX E 255 Where markets exist, costs and benefits are measured as changes in con- sumer and producer surpluses in the relevant markets. Producer surplus is loosely equivalent to the common notion of profits and returns to factors of production, including labor, over and above what these factors would earn in their next-best alternative. Consumer surplus is the analog for consumers their willingness to pay for the commodity they purchase over and above what they must pay on the market to obtain it. Just et al. (1982) provide an excellent text on the measure- ment of market welfare effects. Sometimes the particular good, service, or amenity of interest is not actually marketed and therefore does not have attached to it a market price. Such goods are called nonmarket goods and are generally supplied publicly. Put another way, public actions affect the quantity and quality of these goods. Methods have been developed to obtain estimates of consumer surpluses associated with these nonmarket goods (see Freeman, 1979, and Braden and Kolstad, 19911. The most frequently cited methods are indirect ones such as travel cost (or, more broadly, recreational demand) models and hedonic models; and direct questioning meth- ods, generally termed contingent valuation. The contingent valuation method (CVM) avoids many of the problems in- herent in valuing a nonmarketed commodity by asking individuals directly what they would be willing to pay for the commodity in different contexts. Reliable and valid CVM studies require considerable sophistication in survey design, sampling, and statistical analysis (see Mitchell and Carson, 1989; Carson, 1991~. In theory, however, the approach can be used to estimate an individual's willing- ness to pay for almost any well-defined commodity, and it is this approach that could be used to value some of the less tangible costs and benefits of beach nourishment projects discussed in subsequent sections. A few studies have at- tempted to use contingent valuation techniques to measure recreational benefits associated with beach nourishment projects. Curtis and Shows (1984), Stronge (1991), Silberman and Klock (1988), and Bell (1986) have conducted contingent valuation studies of recreationists' willingness to pay for public beach use. Black et al. (1988) provide a well-developed discussion of recreational beach use but are forced to use secondary data to proxy benefits. The travel cost method is applied chiefly to recreation and thus is particularly applicable to measuring the recreational benefits of beach nourishment projects for those individuals who travel some discernible distance to use the beach. This approach depends on applying conventional welfare economics methods to de- mand functions that are estimated by using the cost of accessing the recreational site as the "price" of the recreational trip. Modern applications include truncated and censored demand models and discrete-choice models of demand for recre- ation at multiple sites (see Smith, 1989, 1991; Bockstael et al., 1987a, 1991; Smith and Desvousges, 1986~. Few, if any, travel cost models have been applied specifically to beach nourishment valuation problems, but the approach has been widely used to value beach recreational benefits in other contexts. Examples
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256 BEACHNOURISHMENT AND PROTECTION include Hanemann (1978), Feenberg and Mills (1980), Bockstael et al. (1987a, b, 1988), Caulkins et al. (1986), Bell and Leeworthy (19901; and Parsons and Kealy (19921. The previous methods estimate annual or current-period benefits. The present discounted value of those benefits must be calculated from extrapolations of these measures into the future. In contrast, the hedonic approach measures the change in the capitalized value of property due to a change in its characteristics or surrounding amenities, where the capitalized value reflects the entire current and expected future values discounted to the present. The hedonic approach appears to be straightforward, but the conditions under which the analysis produces valid welfare measures are rather restrictive. Nonetheless, researchers use this method to approximate these values. The hedonic method is most frequently applied to the housing market, where differences in property values are explained by differences in characteristics and amenities of the properties (see McConnell, 1987; Palmquist, 1991~. As such, hedonic valuation is particularly well suited to valuing the net amenity and storm protection benefits of beach nourishment projects associated with local property, although appropriate data are often difficult to obtain before construction of a project. Curtis and Shows (1984), Stronge (1992), Black et al. (1988), Kerns et al. (1980), Kriesel (1989), and Edwards and Gable (1991) all attempt to assess the benefits of protection of private property by considering property values. Ex- amples of hedonic models applied to related problems include Brown and Pollakowski (1977), Willman (1981), Edwards and Anderson (1984), and Par- sons and Wu (1991~. The distinction between the concept of social (economic) value and that of economic impacts is worth mentioning here. Expenditures or revenues are eco- nomic impact measures. Economic impacts are often confused with economic value, but they are not necessarily related to people's preferences nor are they measures of what things are worth to people. Instead, economic impacts measure market activity: how much money changes hands. They do not take into account what is being given up or existing alternatives. Additionally, they never take into account anything that is not traded on the market. A graphic example of why impacts are not measures of value can be seen by considering natural disasters. Most people would have considered society better off had Alaska's Exxon Valdez oil spill not occurred. Likewise, society would have been better off had the San Francisco earthquake, Hurricane Hugo, or the 1993 Mississippi flood not taken place. Each of these disasters generated enor- mous amounts of economic activity. A large amount of money changed hands. Yet no one would claim that society benefited.
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APPENDIX E 257 BEACH NOURISHMENT COSTS AND BENEFITS Beach nourishment projects, like other public investment projects, are public goods) in that their services can be consumed jointly. The public-good nature of a project suggests that even if it is worth doing from a social standpoint, it is unlikely to be in any one individual's (or firm's) interest to undertake the project privately because the costs will exceed the private gains to any one individual. Since they are similar to other public investment projects, beach nourishment projects could be evaluated by using the same sorts of theory and methodology. Assessing the social value of a beach nourishment project is made more difficult, however, by the fact that the "commodity" provided by the project is multifaceted and difficult to define, and has an uncertain time horizon. For a given beach nourishment project, the benefits may include any or all of the following: · changes in property value resulting from changes in shoreline protection, · changes in beach-user willingness to pay, · changes in amenity value for local residents as a result of a change in beach quality, changes in commercial profits related to beach quality, "downstream" (i.e., out-of-project) benefits, ecological benefits, and positive effects on amenities and local quality of life. Cost categories include: · opportunity costs, · negative downstream or ecological effects, · negative effects on local amenities and quality of life, · increased infrastructure burdens, and · development-induced increases in risk. Benefits Categories Changes in Value Related to Changes in Storm Damage Reduction The value of existing residential and commercial property may change in response to storm damage reduction and erosion control. If a project prevents or iStrictly speaking, these are quasi-public goods. Public goods are goods that can be consumed jointly by many people without diminishing the utility anyone obtains from consumption and include the property of nonexcludability. A quasi-public good is one that can be consumed jointly but is subject to congestion at some level of use.
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258 BEACH NOURISHMENT AND PROTECTION slows coastal erosion that would destroy existing residential property, benefits include the value of the property for the life of the project. If a project alters the probability distribution for storm damage to existing residential property, this needs to be captured as well. Benefits would be based on probabilistic assess- ments of damage together with information on repair and replacement costs. Under some circumstances, the change in the real estate value of the property will reflect this measure, but this change will not be observable a priori. Consumer Surplus f or Willingness to Pay) by Recreationists Visiting the Beach Even though beach visits are not generally directly purchased on a market, the consumption of beach visits generates surplus to consumers. The benefits from a project might be the total consumer surplus associated with beach use if the beach is threatened with destruction or the incremental consumer surplus associated with a change in the quality of the beach brought about by the project. (Substitutes, congestion, etc., must be taken into account.) The measure includes the present discounted value of future recreational values (i.e., consumer surplus, not expenditures) for the life of the project. Changes in Amenity Values Amenity values for local residents may change because of a change in the quality of the beach. This is often reflected in a change in real estate price for the life of the project. Private property owners can gain from an increase in shoreline and beach amenity value (i.e., from being near a more attractive shoreline or one that offers better recreational opportunities). To avoid double counting, the calcu- lation of recreational values needs to include only those benefits associated with individuals that come from a distance at which property values are not affected by the beach amenity value. Changes in Commercial Profits Related to Beach Quality Profits to commercial establishments may change because of a change in the quality of the beach. If a new beach is provided or an existing one improved, surrounding businesses may benefit through greater profits. The proper measure is not revenues but net "producer surplus," which in this example is profits. (If measured as before-tax profit, local tax revenue need not be counted.) Downstream Benefits Benefits may ultimately accrue "downstream," that is, out of the project. If the sand eventually shifts to another location and provides benefits there, those benefits could be counted. They may, however, not start accruing for some time
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APPENDIX E 259 and must be discounted to the present. However, they start accruing "down- stream" as soon as they start diminishing within the project area. Ecological Benefits Any ecological benefits that might arise from a project need to be considered and may include improved and increased nesting opportunities for endangered species. Local Amenities and Quality of Life Positive effects may occur with respect to local (public good) amenities and community quality of life. These may include the positive amenities associated with beach communities. Opportunity Costs Costs Categories The opportunity costs of the labor, capital, energy, and materials used in the construction of a project are a reflection of what is given up elsewhere by using these resources in this employment. To the extent that any of these were previ- ously unemployed, there is no opportunity cost to society. When the activity does not put upward pressure on the prices of inputs, accounting costs reflect social costs. The opportunity costs may exceed accounting costs when the level of activity is sufficient to bid up the prices of the above factors. These costs must include the present value of all renourishment activities required over the relevant time horizon. As renourishment needs are dictated by uncertain storm events, probability distributions on the events will be a necessary input into the valuation. Negative Downstream or Ecological Effects Any negative downstream or ecological effects that result from a project need to be considered. These would include valuing any loss of habitat, for example. Additionally, if the sand used for the project is removed from a site where it provides ecological or other benefits, those costs must be counted as well. Negative Effects on Local Amenities and Quality of Life Negative effects on local (public good) amenities and community quality of life might include changes in the character of a community resulting from in- creased development and congestion.
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260 Increased Infrastructure Burdens BEACH NOURISHMENT AND PROTECTION Beach nourishment projects may potentially increase the burden on local public infrastructure because of increased activity (commercial and recreational). Gains from changes in categories of benefits, in beach-user willingness to pay, increased amenity value for local residents owing to a change in beach quality, and increased commercial profits related to beach quality may be offset if in- creased commercial and recreational activity adds to the infrastructure costs of local communities by increasing the demand for roads, water, sewer, police, and other services. Development-Induced Increases in Risk Increased storm damage reduction and erosion control can potentially in- crease liability for society in the future because of development incentives cre- ated by a project that lead to increased inventories of properties at risk. Analysis of Costs and Benefits Concepts The preceding concepts do not necessarily align themselves with accounting concepts, and thinking in accounting terms can lead to serious errors. Some of the above concepts can be measured directly from observable market data, others by calculating producer and consumer surpluses from estimated supply and demand functions, and still others by using nonmarket methods of valuation. In principle, the USAGE's National Economic Development Procedures Manualfor Coastal Storm Damage and Erosion (USAGE, 1991) seems consis- tent with these valuation concepts. The manual draws on the most recent revision of the Water Resources Council's Principles and Guidelines (P&G; specifically, the 1983 revision of Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies), which sets out cri- teria by which federal water projects undertaken by the USACE, the Bureau of Reclamation, the Tennessee Valley Authority, and the Soil Conservation Service are to evaluate potential projects (WRC, 19831. The USAGE's (1991' procedures manual states that: . . . benefits are defined . . . as increases in the economic value of the goods and services that result directly from a project. ... Because our concern is with the Federal interest, the NED National Economic Development] analysis counts all benefits and all costs wherever they occur. Therefore, to the extent there are economic effects other than those specifically intended, they must be identified and taken into account....Costs are the opportunity costs of diverting resources from another source to implement the project. Uncompensated economic losses from detrimental project effects are also economic costs. What is missing from the procedures manual and is only implied in the P&G
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APPENDIX E 261 is the underlying definition of economic value, and thus the spirit of modern cost-benefit analysis is lost. Instead, one finds mechanical prescriptions for cal- culating these measures that are overly restrictive relative to other federal guide . lines. The P&G distinguishes four types of accounts: National Economic Develop- ment (NED), Regional Economic Development (RED), Environmental Quality, and Other Social Effects. The NED account is restricted to the following goods and services: water supplies, agricultural products, flood protection, electricity generation, transportation, recreation, commercial fishing, and employment of otherwise unemployed or underemployed labor. In many of these categories, the methodological prescriptions appear to be out of date relative to the state of the art and to other agencies' guidelines, largely because the P&G has not been rewritten in a decade.2 Only the NED account is actually measured in comparable units, to be com- pared with direct construction costs of a project. The RED is appropriately omit- ted, since it reflects income and employment gains and losses to the region that would be canceled out at the national scale through redistribution (although it is interesting information for the assessment of distributional implications.' How- ever, environmental quality effects, health effects, and other quality-of-life issues are segregated into accounts that are presented but never incorporated into the cost-benefit analysis. Other federal guidelines, notably those of the EPA, incor- porate these effects. Methods for measuring society's willingness to pay for changes in these nonmarketed goods and services have been developed and con- tinue to be improved. Failing to incorporate these effects biases the cost-benefit analysis. Neither the direction nor the magnitude of the bias can be predicted without further exploration. In some cases, a beach nourishment project that sustains a beach community will have positive amenity values. Little attention has been paid to these types of effects in beach nourishment analysis, so there is little prior information from which to extrapolate. In practice, the USAGE's evaluation of project costs and benefits is based on a comparison of the present value of the net benefits of a project to a "without"- project scenario. These net benefits are compared to construction costs. Guide- lines for calculating storm damage and erosion benefits have received the most attention, chiefly from an engineering standpoint. The emphasis has been on calculating expected damages to private property and public infrastructure and the engineering costs of repair and replacement. Land values or capitalized net income measures are prescribed for erosion control benefit measurement. In practice, the benefits that are emphasized include storm and erosion dam- age control. Recreational benefits are allowed but cannot exceed a given level (50 2 As an example, the P&G seems to advocate tonal travel cost models, an approach that has been surpassed by more sophisticated models in the past decade.
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262 BEACHNOURISHMENT AND PROTECTION percent) of the benefits of the project during formulation of that project. Pre- scribed methodologies for estimating recreational benefits include travel cost and contingent valuation. Costs and benefits associated with gains and losses of eco- logical, community, and other amenities; increased infrastructure burdens; and increased liability do not appear to be included in the evaluation guidelines. SPECIAL FEATURES OF THE BEACH NOURISHMENT PROBLEM Beach nourishment projects provide two kinds of public goods changes in local amenities and reductions in risk of property loss. Because projects are investment goods, the net social returns to projects accrue over time. The tempo- ral nature of a project's impacts poses special problems for valuation, including extrapolating costs and benefits that would accrue in the future, accounting for behavioral responses resulting from the project, and evaluating the effects of uncertainty associated with random future events. Costs and benefits accruing from a project in any period of time depend on the inventory of affected properties and the population of affected individuals. Although this is observable at the time of assessment, even in the simplest of cases it is unlikely to remain constant over the relevant time horizon of the project. An a priori evaluation will require forecasts of demographics, infrastruc- ture, recreational activity, ecology, and other considerations over a long time horizon. The USAGE's guidelines recognize the need for these forecasts. The problem is complicated by the dynamic nature of human behavior. Beach nourishment projects, by providing access to new or different amenities, by chang- ing the probability distribution for storm and erosion damage, and by potentially altering the liability for any damage, will cause behavioral responses that change demographics, recreational activity, infrastructure, property inventories, and so forth. To properly forecast the effects, over time, of a project, these behavioral adjustments due to the project must be taken into account: A simple illustration can be found in the recreational benefits category. A beach nourishment project that increases the size of a beach would result in less congestion if the same number of people use the beach. But since demand for beach use is a function of congestion, demand will shift, leading more individuals to use the beach and more trips by those who previously used it. The new equilib- rium is difficult to predict without empirical modeling but is unlikely to be characterized either by the same level of use or the same level of congestion as before the improvement. To assess the benefits of a project, the researcher needs to estimate both the change in demand for trips and the change in the value of trips as a result of the improvements in the quality of a trip (due to decreased congestion). Potential behavioral responses of the private investment type have even more serious consequences. Consider a beach nourishment project that increases
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APPENDIX E 263 the amenity value of a given piece of privately owned property and reduces the risk of damage to or loss of the property from storms or erosion. As a result of the project, the land use of the property may change. The USACE guidelines recog- nize this and suggest that, in forecasting the "with-plan conditions," "any changes in population, land use, affluence, or intensity of use expected as a result of implementation of a plan" need to be included. In practice, however, these may be limited to gains from.intensified or higher-valued uses of land owing to the reduction in risk. Thus, if a project provides risk reduction to private property, which subsequently stimulates private investment, the increase in net annualized income of the property (for example) may be counted as a benefit. A private action of this sort may or may not be desirable from a social standpoint, and if the action is stimulated by public investment, the full social costs and benefits must be counted. For example, the locality's tax revenue gains from the higher-valued (private) use of the property must be weighed against increases in the burden on local public infrastructure (e.g., increased traffic or parking congestion, increased demands for sewer and water services and police). Additionally, the private investment may change the character of the community (for good or for bad) or may have further ecological ramifications, and these must be taken into account. Estimating the behavioral responses to a project is difficult, but ignoring them can have serious policy implications. Where local land-use plans exist and are enforced, forecasts of "with"- and "without"- project scenarios will necessar- ily be more accurate. In any event, undertaking a beach nourishment project in conjunction with local land-use planning increase the chances of obtaining the maximum net social benefits from a project. The nature of storm events produces great uncertainty about the relevant time horizon over which benefits will accrue or, put another way, great uncer- tainty about the costs of ensuring a given level of benefits over a predetermined time horizon. The concept of the relevant time horizon of the project assessment is an important one for obvious reasons, but if the perceived time horizon of the private sector differs from the USACE plans, assessment can be greatly compli- cated. Private investment responses to projects will depend on what individuals believe the future risks to be and on the institutional structure for handling those risks. A beach nourishment project designed to provide some erosion or storm damage reduction over an average life of 10 years, for example, may be construed by individuals as a signal that the public sector intends to provide protection for the indefinite future. The nature of U.S. social institutions is such that the public frequently provides a safety net in the event of natural disasters. Because invest- ment in private property has been treated as largely irreversible,3 society incurs 3 Programs administered by the Federal Emergency Management Agency may provide assistance for the acquisition, relocation, or demolition of private property exposed to erosion or other hazards.
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264 BEACH NOURISHMENT AND PROTECTION an unknown (but potentially increasing) liability for an indefinite period of time into the future. In the absence of controls, the behavioral response associated with perceived damage reduction of this sort is especially serious since it may raise the level of social liability. Beach nourishment projects may reduce the expected physical impacts of storms and erosion, but by stimulating private investment (and the accompanying public infrastructure), the economic damage associated with any given storm event might even increase. Society becomes liable to protect struc- tures that would not have been built had the private investment decisions taken account of the true cost of insurance. This effect can be exacerbated when the presence of beach nourishment projects reduces the building code requirements along the shoreline.4 The true costs of a project, then, must incorporate this increased liability in the future. Note that downstream benefits, otherwise a posi- tive element in the cost-benefit calculus, may generate expectations and stimulate investment in locations where renourishment projects are not planned, potentially adding to long-term costs as well. Problems are compounded by the uncertainty surrounding the incidence of storm events. The USAGE's calculations of benefits from storm damage reduc- tion appear to be based on expected values of damage reduction (i.e., means of probability distributions). This might be an appropriate procedure if the entire incidence of the uncertainty fell on the federal government.5 However, to the extent that uncertain effects of projects accrue to individuals, expected values or certainty equivalence measures are inappropriate because individuals are gener- ally believed to be risk averse. That is, given two uncertain situations with the same expected value, a nsk-averse individual will prefer the situation with the smallest vanance. Thus, two project designs that generate probability distnbu- tions of storm damage with equal means but differing higher moments would be valued differently. Additionally, alternative projects that are perceived to incor- porate different levels of risk (i.e., different variances) will differentially stimu- late private investment. REFERENCES Bell, F. W. 1986. Economic policy issues associated with beach renourishment. Policy Studies Re view 6:374-381. Bell, F. W., and V. R. Leeworthy. 1990. Recreational demand by tourists for saltwater beach days. Journal of Environmental Economics and Management 18:189-205. 4Additionally, "downstream" benefits from sand drift may be interpreted by property owners as long-term effects and provide false signals for development where no long-term commitment has been made. 5 Whether federal government policies should be risk neutral is a debated issue.
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APPENDIX E 265 Black, D. E., L. P. Donnelley, and R. F. Settle. 1988. An Economic Analysis of Beach Renourishment for the State of Delaware. Preliminary report. Dover: Delaware Department of Natural Re- sources and Environmental Control. Bockstael, N. E., W. M. Hanemann, and I. E. Strand. 1987a. Measuring, the Benefits of Water Quality Improvements Using Recreational Demand Models. Report prepared for the U.S. Envi- ronmental Protection Agency, Cooperative Agreement CR-811043-01-0. Washington, D.C.: EPA. Bockstael, N. E., W. M. Hanemann, and C. L. Kling. 1987b. Modeling recreational demand in a multiple site framework. Water Resources Research 23:951-960. Bockstael, N. E., K. E. McConnell, and I. E. Strand. 1988. Benefits from Improvements in Chesa- peake Bay Water Quality. Report prepared for the U.S. Environmental Protection Agency, Cooperative Agreement CR-811043-01 -0. Washington, D.C.: EPA. Bockstael, N. E., K. E. McConnell, and I. E. Strand. 1991. Recreation. In: Measuring the Demand for Environmental Quality. J. B. Braden and C. D. Kolstad, eds., New York: North Holland. Braden, J. B., and C. D. Kolstad, eds. 1991. Measuring the Demand for Environmental Quality. New York: North Holland. Brown, G., and K. Pollakowski. 1977. Economic valuation of shoreline. Review of Economics and Statistics (August) 59(3):272-278. Carson, R. 1991. Constructed markets. In: J. B. Braden and C. D. Kolstad, eds., Measuring the Demand for Environmental Quality. New York: North Holland. Caulkins, P. P., R. C. Bishop, and N. W. Bouwes. 1986. The travel cost model for lake recreation: a comparison of two methods for incorporating site quality and substitution effects. American Journal of Agricultural Economics 68:291-297. Curtis, T. D., and E. W. Shows. 1984. A Comparative Study of Social Economic Benefits of Artifi- cial Beach Nourishment Civil Works in Northeast Florida. Report for the Florida Division of Beaches and Shores by the University of South Florida. Edwards, S. F., and G. D. Anderson. 1984. Land use conflicts in the coastal zone: an approach for the analysis of the opportunity costs of protecting coastal resources. Northeastern Journal of Agri- cultural Economics Management 13:73-81. Edwards, S. F., and F. J. Gable. 1991. Estimating the value of beach recreation from property values: an exploration with comparisons to nourishment costs. Ocean and Shoreline Management 15:37-55. Feenberg, D., and E. S. Mills. 1980. Measuring the Benefits of Water Pollution Abatement. New York: Academic Press. Freeman, A. M. 1979. The Benefits of Environmental Improvement: Theory and Practice. Baltimore: Johns Hopkins Press. Freeman, A. M. 1993. The Measurement of Environmental and Resource Values: Theory and Meth- ods. Washington, D.C.: Resources for the Future. Hanemann, W. M. 1978. A Methodological and Empirical Study of the Recreation Benefits from Water Quality Improvement. Ph.D. dissertation, Harvard University. Haveman, R. H. 1969. The Analysis and Evaluation of Public Expenditures: An Overview. Washing- ton, D.C.: U.S. Government Printing Office. Inter-Agency River Basin Committee. 1950. Proposed Practices for Economic Analysis of River Basin Projects. Washington, D.C.: U.S. Government Printing Office. Just, R. E., D. L. Hueth, and A. Schmitz. 1982. Applied Welfare Economics and Public Policy. Englewood Cliffs, N.J.: Prentice-Hall. Kerns, W. R., R. J. Byrne, and C. H. Hobbs. 1980. An economic analysis strategy for management of shoreline erosion. Coastal Zone Management 8:165-184. Kriesel, W. 1989. Coastal Erosion and the Residential Property Market. Fact Sheet 044, Ohio Sea Grant College Program, Ohio State University, Columbus.
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266 BEACHNOURISHMENT AND PROTECTION McConnell, K. E. 1987. Congestion and willingness to pay: a study of beach use. Land Economics 53:185-195. Mitchell, R. C., and R. T. Carson. 1989. Using Surveys to Value Public Goods: The Contingent Valuation Method. Washington, D.C.: Resources for the Future. Palmquist, R. 1991. Hedonic methods. In: J. B. Braden and C. D. Kolstad, eds., Measuring the Demand for Environmental Quality. New York: North Holland. Parsons, G. R., and M. J. Kealy. 1992. Randomly drawn opportunity sets in a random utility model of lake recreation. Land Economics 68:93-106. Parsons, G. R., and C. Wu. 1991. The opportunity cost of coastal land-use controls: An empirical analysis. Land Economics 67(3):308-316. Silberman, J., and M. Klock. 1988. The recreation benefits of beach nourishment. Ocean and Shore- line Management 2:73-90. Smith, V. K. 1989. Taking stock of progress with travel cost recreation demand methods: theory and implementation. Marine Resource Economics 6:279-310. Smith, V. K. 1991. Household production functions and environmental benefit estimation. In: J. B. Braden and C. D. Kolstad, eds., Measuring the Demand for Environmental Quality. New York: North Holland. Smith, V. K., and W. H. Desvousges. 1986. Measuring Water Quality Benefits. Boston: Kluwer Nijhoff. Stronge, W. B. 1991. Recreational benefits of barrier island beaches: Anna Maria, Captiva, and Marco, A Comparative Analysis. In: Preserving and Enhancing Our Beach Environment, Pro- ceedings of the 4th Annual National Conference on Beach Preservation Technology. Tallahas- see: Florida Shore and Beach Preservation Association. Stronge, W. B. 1992. Impact of Captiva's Beaches on Property Values and Taxes. Report prepared for Captiva Erosion Prevention District by Regional Research Associates, Inc., Boca Raton, Florida, December. USACE. 1991. National Economic Development Procedures Manual for Coastal Storm Damage and Erosion. IWR Report No. 91-R-6. Fort Belvoir, Va.: Institute for Water Resources, Water Resources Support Center, U.S. Army Corps of Engineers. Willman, E. A. 1981. Hedonic prices and beach recreational values. In: V. K. Smith, ea., Advances in Applied Microeconomics, Vol. I. Greenwich, Conn.: JAI Press. WRC. 1983. Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies. U.S. Water Resources Council, Washington, D.C.: U.S. Government Printing Office.
Representative terms from entire chapter: