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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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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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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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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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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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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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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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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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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.
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Representative terms from entire chapter:
nourishment projects
