Applications of Economics in the Field of Environmental Marine Biotechnology

Diane Hite

INTRODUCTION

The objective of this discussion is to review the current state of economics as it relates to the field of environmental marine biotechnology and to identify areas in which economics may play an important role. In general, physical scientists in many areas have not fully taken into account the economic implications of their research. This observation also applies to scientists involved in the study of marine biotechnology. Thus, there is almost no existing economics literature that relates to marine environmental biotechnology.

Most current economic research that deals with biotechnology in general has been primarily focused on topics that fall squarely in the realm of standard neoclassical economic analysis. Included in this area are topics such as patents and intellectual property rights (Bhat 1996), innovation (Audretsch and Stephan 1999; Mowery and Rosenberg 1998), the impact of biotechnology on industry structure (Acharya and Ziesemer 1996; Begemann 1997; Bijman 1996; Powell 1996), the ability of biotechnology to help increase food supplies (Rosegrant and Ringler 1997), and consumer acceptance of genetically modified foods (Caswell 1998). These fall in the areas of economics of innovation, industrial organization and agricultural, development, and consumer economics.

Department of Agricultural Economics, Mississippi State University, Mississippi State, MS



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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP Applications of Economics in the Field of Environmental Marine Biotechnology Diane Hite INTRODUCTION The objective of this discussion is to review the current state of economics as it relates to the field of environmental marine biotechnology and to identify areas in which economics may play an important role. In general, physical scientists in many areas have not fully taken into account the economic implications of their research. This observation also applies to scientists involved in the study of marine biotechnology. Thus, there is almost no existing economics literature that relates to marine environmental biotechnology. Most current economic research that deals with biotechnology in general has been primarily focused on topics that fall squarely in the realm of standard neoclassical economic analysis. Included in this area are topics such as patents and intellectual property rights (Bhat 1996), innovation (Audretsch and Stephan 1999; Mowery and Rosenberg 1998), the impact of biotechnology on industry structure (Acharya and Ziesemer 1996; Begemann 1997; Bijman 1996; Powell 1996), the ability of biotechnology to help increase food supplies (Rosegrant and Ringler 1997), and consumer acceptance of genetically modified foods (Caswell 1998). These fall in the areas of economics of innovation, industrial organization and agricultural, development, and consumer economics. Department of Agricultural Economics, Mississippi State University, Mississippi State, MS

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP There is a need for a broader social economic approach to analyze the marine environmental biotechnology issues that are not currently being fully addressed. Social economics includes areas such as health economics, environmental economics, ecological economics, and public finance. A particularly useful analytical tool that has emerged from these fields is cost benefit analysis, which I argue will provide a useful tool to examine the economic issues inherent in marine environmental biotechnology. BACKGROUND Benefit cost analysis has become the standard method for determining the value of government projects and policies from a societal perspective. The objective is to establish all the potential costs and benefits that would be derived from a given project and then to determine whether the net outcome would have a positive impact. The benefits and costs should, as much as possible, reflect both tangible and intangible aspects of a project. Neoclassical economics addresses the benefits and costs of a project that can be measured in existing markets for goods and services. For example, the benefit that individuals derive from consumption of fish can be measured by the demand for fish, and costs incurred by suppliers can be derived from the supply curve for fish. Thus, many aspects of a project can be directly measured by examining well-defined market behavior. From a social economic point of view, a number of benefits and costs are derived from various projects and programs that are not valued in conventional economic markets. These are called externalities, or external costs and external benefits. Externalities are formally defined as unpriced outputs or inputs into a production process or other economic activity, and generally we use special techniques called nonmarket valuation to try to establish prices in such a case. The classic example of an external cost is air pollution, which is the byproduct of a smokestack industry. The costs of pollution on society can range from morbidity and perhaps mortality resulting in lost worker productivity, to the lost sense of well-being individuals may feel from reduced visibility. Air pollution externalities of this type have been studied by a number of environmental economists (Brookshire and others 1982; Freeman 1974; Schulze and others 1998). If all of the externalities and spillovers from a project are not accounted for, projects that are potentially worthy of funding may not be deemed economically feasible. However, many projects are undertaken in which associated externalities are not accounted for, resulting in devastating negative economic impacts. Misguided agricultural policies in less

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP developed countries illustrate this point well—for instance, World Bank funding of US style farm techniques in Africa has been recognized as an exacerbating factor in desertification and microclimate change. APPLICATION OF BENEFIT COST ANALYSIS TO BIOTECHNOLOGY IN MARICULTURE There are a number of applications for benefit cost analysis in environmental marine biotechnology. One example is the analysis of mariculture of genetically modified marine species (Hite and Gutrich 1998). I present some of the basic concept of that paper here. Central to the analysis is the idea that a number of the issues addressed here should be viewed as increments to costs and benefits that already exist in the marine aquaculture industry. It should be noted that genetic modification is a relatively minor player in biotechnology, and the following analysis is meant only to illustrate the significance of the economic concepts of spillovers and externalities. Neoclassical Economic Benefits and Costs From a neoclassical economic standpoint, potential benefits would include increased growth rates of maricultured macroorganisms. Because some modified species can mature in 67% of the normal time, reach sizes up to 11 times that of their natural counterparts, or both, an increase in food supply would result. The effect would be enhanced by potential improvement to marine plant and animal health. The primary costs that accrue to such an enterprise are related to regulatory and containment costs to prevent accidental releases. Included in containment costs are costs of increasing the strength of cages and securing facilities beyond that already experienced in conventional mariculture. Forster (1996) reports the cost of aquaculture cages ranges from $10 to $100/m3, with the most expensive cages providing the most containment protection, but suggests that aquaculture would become unprofitable with cage prices above $50/m3. The cost of monitoring to avoid accidental releases would potentially be extremely high and could be particularly difficult to implement; in 1995, expenditures for enforcing all environmental regulations amounted to approximately $115 billion. Costs from a Social Economic Perspective External or social costs associated with an activity can be significant, as are some of those associated with current mariculture practices. For instance, large scale farming of marine species may damage the benthic

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP layer of the ocean. Thus, to the extent that the introduction of genetic modifications would encourage the growth of the mariculture industry, an additional external cost would be incurred. A second possible external cost that might accrue is the contribution of wide-scale mariculture in exacerbating problems associated with resistant microorganisms. Microbe resistance presents an enormous risk for human health and creates problems for the mariculture industry in that diseases of macroorganisms held in close quarters may create a significant financial risk. A third consideration is the concept of pecuniary externalities that arise from increased supplies of fish on the market as a result of genetically enhanced mariculture. Regulatory distortions in the worldwide fishing industry have arisen as a result of attempts to curtail overfishing by limiting fishing seasons. Fleets have reacted by investing heavily in expensive capital equipment, resulting in increases in fleet size from about 2.2 million to 3.3 million vessels worldwide from 1970 to 1989 (Powers 1995), and tonnage has nearly doubled (FAO 1995). The end result is that if increased supplies of fish result from genetic modification in mariculture, prices should fall. In response to lower prices, the existing fishing industry would have a perverse incentive to apply more effort in natural fisheries, depleting natural stocks at a rate faster than currently experienced. Finally, there are external costs associated with the risk of accidental release of a genetically modified species. To assess such a cost, it is necessary to take into consideration what would become of an organism should it escape, that is, to determine whether it will be able to survive out of captivity and if so, fill some ecological niche and disrupt the biodiversity of the marine environment and become established as an exotic species. Examples of exotic marine species disrupting ecosystems and economies are abundant (e.g., release of an exotic ctenophore in the Black and Azov seas that led to the collapse of local fisheries [Travis 1993]). However, the best-known case is perhaps that of Dreissena (zebra mussels). It has been estimated that as of the year 2000, this species will have incurred economic costs of $3 billion to $5 billion annually (ASNTF 1992; Cohen and Carleton 1995). In addition, this species has the ability to drastically alter local freshwater habitats by changing water clarity. Habitat disruption may have even more serious economic implications, as discussed below. Benefits from a Social Economic Perspective Significant beneficial externalities would accrue to genetic enhancement of food fish. Included among these benefits are the potential for reduced pressure on natural fisheries and perhaps preserving some of the biodiversity of the marine environment. This latter benefit is certainly

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP contingent on the future regulation and reaction of the world's fishing fleets, as noted previously. This is a particularly significant benefit because seafood demand is expected to increase 70% in next 35 years (JSA 1992; NSTC 1995), and in six of 11 fishing regions, more than 60% of species have already been depleted or fished to their biological limit (FAO 1995). This fact has additional economic implications for labor markets; for instance, 40,000 jobs were lost in eastern Canada in 1992 as a result of the collapse of the Atlantic cod fishery (Clayton 1995; Garcia and Newton 1994; WRI 1996). BROADER APPLICATIONS OF ECONOMICS IN ENVIRONMENTAL MARINE BIOTECHNOLOGY During the National Research Council Workshop on Environmental Marine Biotechnology, a number of areas of interest for research in various areas of physical and marine sciences were broached. In this section, I discuss the role of economics in justifying and enhancing these areas of research. I address the three broad interest areas discussed in this workshop—biomaterials, bioremediation, and restoration. Biomaterials In the area of biomaterials, it appears that the development of materials dealing with biofilms will have a very significant benefit from a societal standpoint. In particular, Dr. Costerton emphasized that 65% of all infections are biofilm infections that are related to the formation of polysaccharides and that such infections are highly resistant to antimicrobials. Dr. Costerton suggested ways in which development of polysaccharides could be blocked, thereby preventing a number of serious infections. From a health economics perspective, this research could have major repercussions in that it can provide new means to control human bacterial infections without the development of new antibiotics. The current state of drug-resistant microbes has been very costly to society—the cost of antibiotic resistance has recently been estimated at $30 billion per annum in the United States (Spake 1999). It is unclear what is included in this cost estimate, but it would be increased substantially by costs attributable to lost research and development investment. It is probable that the time spent on developing new antibiotics is longer than the time it takes for them to lose effectiveness. In addition, the ineffectiveness of antibiotics contributes to lost economic productivity from labor force morbidity and mortality, and can help to escalate medical costs. Dr. Mittelman brought up another aspect of the biofilms-health interface when he emphasized the role of biofilms in harboring bacteria that

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP are potentially harmful to health (e.g., Legionella). Once again, from Dr. Mittelman's perspective, biofilms research would have major applications in prevention of microbial infection, particularly in instances where surface adhesion of biofilms poses infection risk, such as in artificial hearts and urinary tract infections associated with catheterization. Once again, the spillover benefits of controlling biofilm infections would be great and would present possibilities for prevention of nosocomial infections that contribute directly to hospital costs and indirectly to economic productivity. Dr. Manyak also touched on the health care theme when he discussed the use of marine proteins in medical device applications. Bioremediation Bioremediation is one area in which the benefits of research are quite obvious. Bioremediation can represent huge cost savings to firms that are responsible for cleaning up oil spills, for instance. Bioremediation may also increase the recovery rate of valuable fisheries after a spill, providing economic benefits to local economies. In addition, bioremediation may provide a means to clean oil spills more thoroughly, leading to restoration of a larger variety of species than might be otherwise unattainable. Dr. Young presented research on ways to biodegrade petroleum in estuarine sediments. Deposition of sediments has limited access to many ports, and toxic substances in the sediments have rendered other types of remediation, such as dredging, impractical. By finding ways to eliminate toxics from sediment, dredging could once again be used to open ports to a wider variety of ship traffic. The economic benefits could be measured directly, in terms of job creation and other economic activity. However, from an economic justice standpoint, such research could have positive repercussions if inaccessible ports have contributed to economic decline in an inner city such as in Newark, New Jersey (Economics faculty, NJ Institute of Technology, 1996, personal communication). Other aspects of marine bioremediation as discussed by Drs. Lee, Porter, and Mendelssohn have important economic components. The most important area to be considered is the contribution of bioremediation to overall ecosystem health. In the case of residual hydrocarbons, a relevant question is: How will the health of a fishery be impacted? The same question applies in the case of marsh remediation; marshes are biologically sensitive areas that house nurseries and spawning grounds for a number of marine species. Thus, economic spillovers would accrue to areas offsite from the marsh area. The significant economic impact of coastal wetlands remediation and cleanup on recreation and coastal real estate values, mentioned earlier in this session, is external to the cleanup itself. The value of worldwide coastal tourism alone increased 20-fold

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP from 1950 to 1995—to $60 billion per year—and is expected to double again by 2010 (McGinn 1999). Restoration Drs. Morse and Richardson discussed the restoration of coral reefs and the diseases and other factors that are affecting reef health and viability. Reefs are known to provide a large number of ecological services to the marine environment, and loss of reefs poses a potentially serious threat to that environment. One example of an economic cost of reef loss is in the subsequent loss of other marine species that rely on the reef during some or all of their life cycles. Another is their significant role in the livelihood of food fish species. Direct economic benefits of reefs may be measured by local tourism expenditures. Bonaire Marine Park, for example, generates annual gross revenues of $23.2 million/annum for dive-based tourism (Dixon and others 1993, 1994; Scura and Van't Hof 1993). Many of the world 's reefs are in less developed countries or in small countries that base a large portion of their national economy on tourism based on reefs. REFERENCES Acharya R, Ziesemer T. 1996 A closed economy model of horizontal and vertical product differentiation: The case of innovation in biotechnology. Econ Innovat New Technol 4:245-264. ASNTF [Aquatic Species Nuisance Task Force]. 1992 Proposed Aquatic Nuisance Species Program. Alexandria, VA: US Fish and Wildlife Service. Audretsch DB, Stephan PE. 1999 Knowledge spillovers in biotechnology: Sources and incentives. J Evolut Econ 9:97-107. Begemann BD. 1997 Competitive strategies of biotechnology firms: Implication for US agriculture. Agric Appl Econ 29:117-22. Bhat MG. 1996 Trade-related intellectual property rights to biological resources: Socioeconomic implications for developing countries. Ecolog Econ 19:205-217. Bijman JW. 1996 Biotechnology and vertical integration in the Dutch potato chain. In: Galizzi G, Venturini L, eds. Economics of Innovation: The Case of Food Industry. Contributions to Economics. Heidelberg: Physica. Brookshire DS, Thayer M, Schulze WD, D'Arge RC. 1982 Valuing public goods: A comparison of survey and hedonic approaches Am Econ Rev 72:165-178. Caswell JA. 1998 How labeling of safety and process attributes affects markets for food. Agric Resource Econ Rev 27:151-158.

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP Clayton M. 1995 A Fish Tale? Canada Tries to Save Stocks While Overfishing. Christian Science Monitor, March 20, 1995. p 52. Cohen AN, Carlton JT. 1995 Non-indigenous aquatic species in a United States estuary: A case study of the biological invasions of the San Francisco Bay and delta Report to the US Fish and Wildlife Service. Washington, DC: GPO. Dixon JA, Scura LF, Carpenter RA, Sherman PB. 1994 Economic Analysis of Environmental Impacts London: Earthscan Publications, Ltd. Dixon JA, Scura LF, Van't Hof T. 1993 Meeting ecological and economic goals: Marine parks in the Caribbean Am Bio 23:117-125. FAO [Food and Agriculture Organization of the United Nations]. 1995 Review of the state of world fishery resources: Marine fisheries. FAO Circular No. 884. Rome: FAO. Forster J. 1996 Cost and marker realities in open water aquaculture. Proceedings of the Open Ocean Aquaculture Conference cosponsored by the University of Maine and the University of New Hampshire, Portland, OR, May 8-10, 1996. Freeman AM, III. 1974 On estimating air pollution control benefits from land value studies J Environ Econ Managemt 1:74-83. Garcia S, Newton C. 1994 Current situations, trends, and prospects in world capture fisheries Paper presented at the Conference on Fisheries Management: Global Aspects, Seattle, WA. Hite D, Gutrich J. 1998 An economic analysis of introduced marine genetically engineered organisms. In: Zilinskas RB, Balint PJ, eds. Marine Biotechnology: Assessing and Managing the Economic and Ecological Risks. The Netherlands: Kluwer. JSA [Joint Subcommittee on Aquaculture]. 1992 Aquaculture in the United States: Status, opportunities and recommendations A report to the Federal Coordinating Council on Science, Engineering, and Technology. Washington, DC: USDA. McGinn AP. 1999 Safeguarding the Health of the Oceans. Worldwatch Paper 145. Washington, DC: Worldwatch Institute. Mowery DC, Rosenberg N. 1998 Paths of Innovation: Technological Change in Twentieth-Century America Cambridge: New Cambridge University Press. NSTC [National Science and Technology Council; Office of Science and Technology Policy]. 1995 Biotechnology for the 21st century: New horizons. Washington, DC: GPO. Powell WW. 1996 Inter-organizational collaboration in the biotechnology industry. J Inst Theoret Econ 152:197-215. Powers D. 1995New frontiers in marine biotechnology: Opportunities for the 21st century. In: Lundin CG, Zilinskas RA, eds. Marine Biotechnology in the Asian Pacific Region. Stockholm: World Bank.

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OPPORTUNITIES FOR ENVIRONMENTAL APPLICATIONS OF MARINE BIOTECHNOLOGY: PROCEEDINGS OF THE OCTOBER 5-6, 1999, WORKSHOP Rosegrant MW, Ringler C. 1997 World food markets into the 21st century: Environmental and resource constraints and policies. Aust J Agric Resource Econ 41:401-428. Schulze WD, McClelland GH, Lazo JK, Rowe RD. 1998 Embedding and calibration in measuring non-use values. Resource Energy Econ 20:163-178. Scura LF, van't Hof T. 1993 Economic feasibility and ecological sustainability of the Bonaire Marine Park. Environment Department Positional Working Paper 1993-44. Washington, DC: World Bank. Spake A. 1999 Losing the Battle of the Bugs. US News & World Report, May 10, 1999. p 52. Travis J. 1993 Invader threatens Black Azov seas. Science 262:1366-1367. WRI [World Resources Institute]. 1996 World resources guide to the global environment. New York: Oxford University Press.