On July 27, John started a discussion of how economists measure the value of environmental changes (Environmental Benefits: Theory). To continue that thread, I would like to introduce one of the methods economists use to measure economic surplus: the travel cost method.
Environmental changes are difficult to value because there is no price or market associated with the change. If we could buy and sell nitrogen in local waterways we would be able to measure the value of changes in nitrogen levels. Unfortunately, we can't buy and sell nitrogen emissions, and a nitrogen market can't exist unless local waterways are fully privatized and all sources of nitrogen are identified. How then do we measure the value of a change in nitrogen levels (or beach erosion, or reforestation, or snow mobile restrictions, or...)?
The answer originates from a letter Harold Hotelling (a famous statistician and economist) wrote to the National Park Service in 1949[1]. In the letter, Hotelling made the astute observation that the cost of getting to a recreation site can serve as a reasonable proxy for the price of a trip to that site. In other words, Hotelling argued that we should be able to trace out a relationship between the number of trips people take to a recreation site and the cost of taking those trips. What are the primary costs of taking a trip to a recreation site? Travel distance and travel time. If we calculate the cost of traveling to a site (easy) and the cost of time spent traveling (much more difficult), then we can estimate the demand for recreation trips.
By now you should be asking yourself, what does this have to do with valuing a change in environmental quality? Let's go back to the nitrogen example. Suppose a hog lagoon in eastern North Carolina leaks during heavy rains (yep, it happens) dumping nitrogen rich waste (read: pig poop) into local waterways. What do we expect to happen? Well, one thing we would expect is the number of recreation trips taken to local waterways to go down. A decrease in demand.
How do we measure the costs of the poop spill? We measure the change in economic surplus (John defines economic surplus here) in the market for recreation trips. Changes in the market for recreation trips give an indirect link to changes in environmental quality for people that take recreation trips. The tough part is measuring the demand for recreation trips. This requires extensive (and potentially expensive) surveys.
Stay tuned for more...
NOTE: This is a grossly simplistic introduction. For those interested in seeing an application of the travel cost methods, take a look at Frank Lupi's Michigan Angling Demand Model. For more non-technical details on the travel cost method, take a look at the Ecosystem Valuation Travel Cost Method page.
[1] Hotelling, Harold. 1949. An Economic Study of the Monetary Valuation of Recreation in the National Parks. Washington, DC: U.S. Department of the Interior, National Park Service and Recreational Planning Division.