Session 7 Valuing Changes in Production Basic Principles with

Session 7 Valuing Changes in Production—Basic Principles with an Example from the Philippines John A. Dixon johnkailua@aol. com The World Bank Institute Ashgabad, November 2005 Caspian EVE 2005/UNDP and WBI Dixon, Valuing Changes in Production John A. GEF

Change in Productivity – more than just Ps and Qs? ? • The most basic valuation technique – relies on physical measures of changes in production (the Qs) and prices, often market prices (the Ps) • Then, P x Q = a monetary value • Key assumption – the prices are nondistorted and reflect opportunity costs Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Applications of Change in Productivity approach • Natural resource sector – changes in crop production, forestry, fisheries, aquifers, others • Human Health – another form of change in productivity • Ecosystems – harder to measure but possible. E. g. watersheds, coral reefs, mangroves, others Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Cautions • Cause and effect links need to be clearly understood – percentage change in mangroves and decrease in fish catch • Prices – make sure prices are appropriate for the commodity and the scale – e. g. Mendelsohn study on value of tropical rainforest (per ha) never considered marketing all the output! Or the Puerto Rican mangrove damage study – buying mangroves retail by the hectare! Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Advantages • Produces valuation results in monetary term and can be easily explained to Minister of Finance (and the press and public)! • Transparent approach that can be easily re-calculated and used to provoke a discussion(e. g. if you don’t like my numbers, give me better ones!) • Does NOT rely on CVM!! Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Valuing Productivity Impacts in Palawan, Philippines Palawan – An application of the change in production approach with unidirectional externalities (or, should Mr. Coase visit Palawan? ) 3 main user groups (all legal users): – Loggers – Traditional fishermen – Resort operators / scuba divers Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Valuation Techniques • Changes in Production – Crops, fisheries, water – Health – Opportunity cost/ecosystems • Survey Techniques – CVM (Contingent Valuation Method) • Surrogate Markets – Travel Cost • Hedonic Approaches – Property value – Land values – Wage differential Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Change in Production – the study site PALAWAN Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Change in Production – changes in variables/ productivity over time -- PALAWAN Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Change in Production - PALAWAN The Economic Analysis: • Examined Generation of Gross Revenues from three industries – Logging – Fisheries – Tourism • Assumptions – Revenue information easier to obtain than cost data (second best solution); not a BCA! – Even imperfect information can prompt better disclosure and increased provision of data Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Change in Production - PALAWAN Gross Revenues Over 10 Years (millions $) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Is a Coasian solution possible? ? • Coase Theorem: irregardless of the initial resource(or property rights) allocation, with trade it will be possible to reach a pareto superior outcome – What do you suggest in the case of Palawan? – What are the most likely obstacles to a Coasian solution – What about equity issues? Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Other alternatives include (and their pros and cons) • Government imposed logging ban (but question of an “economic taking”)? ? • Fisherman and tourism resort operators join forces to “buy out” the loggers – what are the problems with this? ? • Alternative logging practices – can these solve the externality problem and allow continued logging? ? Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Palawan revisited • Loggers stopped initially and then returned • Reef damaged but has recovered over the past 10 years • Tourism has expanded – but this is a case of before/after analysis NOT with and without analysis! • Valuable for planning land use in other sites Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Change in Production – the lessons from the PALAWAN study 1. 2. 3. 4. Modest research costs to produce useful results Value of combined ecological-economic analysis Broader applicability of approach Valuation and evaluation techniques exist that can be used 5. Useful for convincing decision makers that these resources have value Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

Change in productivity can be used in many situations • Changes in recreational values • Change in agricultural productivity in the Iran due to changes in water quantity and quality • Change in fish catch due to stock degradation (Caspian; worldwide) • Change in lake water quality due to shoreline development Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF

A Final Note – Gross vs Net Values • Change in productivity should normally be done on a net value basis (seeking changes in economic values, not gross revenues) • Sometimes, however, gross values are presented (as in Palawan) • The correct measure depends on the resource and the type of change (lost production versus complete loss, and production decisions made) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production GEF