Methods, Section 2
Productivity Methods
Estimates economic values for
ecosystem products or services that contribute to the production of commercially
marketed goods.
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Overview
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Why Use the
Productivity Method?
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Application
of the Productivity Method
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Summary
of the Productivity Method
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Applying
the Productivity Method
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Advantages
of the Productivity Method
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Issues
and Limitations of the Productivity Method
Overview
The productivity method, also referred
to as the net factor income or derived value method, is used to estimate
the economic value of ecosystem products or services that contribute to
the production of commercially marketed goods. It is applied in cases
where the products or services of an ecosystem are used, along with other
inputs, to produce a marketed good.
For example, water quality affects the
productivity of irrigated agricultural crops, or the costs of purifying
municipal drinking water. Thus, the economic benefits of improved
water quality can be measured by the increased revenues from greater agricultural
productivity, or the decreased costs of providing clean drinking water.
This section continues with some example
applications of the productivity method, followed by a more complete technical
description of the method and its advantages and limitations.
Hypothetical Situation
A reservoir that provides water for a
city・s drinking water system is being polluted by agricultural runoff.
Agency staff want to determine the economic benefits of measures to eliminate
the runoff.
Why Use the Productivity Method?
The productivity method was selected because
this is a straightforward case where environmental quality directly affects
the cost of producing a marketed good・municipal drinking water. This example
is one of the simplest cases, where cleaner water is a direct substitute
for other production inputs, such as water purification chemicals and filtration.
Thus, the benefits of improved water quality
can be easily related to reduced water purification costs.
Application of the Productivity Method
Step 1:
The first step is to specify the production
function for purified drinking water. This is the functional relationship
between the inputs・water of a particular quality from the reservoir, chemicals,
and filtration, and the output・pure drinking water.
Step 2:
The second step is to estimate how the
cost of purification changes when reservoir water quality changes, using
the production function estimated in the first step. The researcher
would calculate the quantities of purification chemicals and filters needed
for different levels of reservoir water quality, by plugging different
levels of water quality into the production function. These quantities
would then be multiplied by their costs.
Step 3:
The final step is to estimate the economic
benefits of protecting the reservoir from runoff, in terms of reduced purification
costs. For example, if all runoff is eliminated, the reservoir water
will need very little treatment and the purification costs for drinking
water will be minimal. This can be compared to the cost of purifying
water where runoff is not controlled. The difference in purification
costs is an estimate of the benefits of eliminating runoff. Similarly,
the benefits for different levels of runoff reduction can be estimated.
This step requires information about the projected success of actions to
reduce runoff, in terms of the decrease in runoff and the resulting changes
in reservoir water quality.
How Can the Results be Used?
The results of the analysis can be used
to compare the benefits of achieving different levels of water quality
in the reservoir with the cost of programs to reduce or eliminate the polluting
runoff, and thus improve water quality.
Case Study Example of the Productivity
Method・ Values of Wetlands in the Peconic
Estuary, Long Island
The Situation
The Peconic Estuary includes many productive
wetlands of different types, including eelgrass, saltmarsh, and intertidal
mudflats. Development and resulting water quality degradation have
reduced the quantity of these wetlands, and may continue to do so in the
future.
The Challenge
The Peconic Estuary Program is considering
various management actions for the Estuary and surrounding land areas.
In order to assess some of the values that may result from these management
actions, a productivity study for wetlands was conducted.
The Analysis
The study focused on valuing marginal
changes in acres of wetlands, in terms of their contribution to the production
of crabs, scallops, clams, birds, and waterfowl. It was assumed that
wetlands provide both food chain and habitat support for these species.
First, the productivity of different wetlands types in terms of food chain
production was estimated and linked to production of the different species
of fish. Second, the expected yields of fish and birds per acre of
habitat was estimated. Finally, the quantities of expected fish and
bird production were valued using commercial values for the fish, viewing
values for birds, and hunting values for waterfowl.
The Results
The study results estimated that an acre
of eelgrass is worth $1065 per year, an acre of saltmarsh is worth $338
per year, and an acre of intertidal mudflat is worth $68 per year, in terms
of increased productivity of crabs, scallops, clams, birds, and waterfowl.
Based on the results of this study, managers can calculate the economic
value, for productivity services, of preserving or restoring wetlands in
the Estuary. These values do not capture the full value of the wetlands,
because they only address values in production of commercially and recreationally
valuable species. Thus, they are an understatement of the total economic
value for the wetlands, which might include other services, such as erosion
and storm protection or aesthetics.
Summary of Productivity Methods
The net factor income, derived value, or
productivity method is used to estimate the economic value of ecosystem
products or services that contribute to the production of commercially
marketed goods. It is applied in cases where the products or services
of an ecosystem are used, along with other inputs, to produce a marketed
good.
For example, water quality affects the
productivity of irrigated agricultural crops, or the costs of purifying
municipal drinking water. Thus, the economic benefits of improved
water quality can be measured by the increased revenues from greater agricultural
productivity, or the decreased costs of providing clean drinking water.
If a natural resource is a factor of production,
then changes in the quantity or quality of the resource will result in
changes in production costs, and/or productivity of other inputs.
This in turn may affect the price and/or quantity supplied of the final
good. It may also affect the economic returns to other inputs.
Two types of benefits (or costs) may be
important. First, if the quality or price to consumers of the final
good changes, there will be changes in consumer
surplus . Second, if productivity or production cost changes,
there will be changes in producer surplus
. Thus, the economic benefits from improvements in the resource can
be estimated using changes in observable market data.
Applying the Productivity Method
To apply the productivity method, data
must be collected regarding how changes in the quantity or quality of the
natural resource affect:
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costs of production for the final good
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supply and demand for the final good
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supply and demand for other factors of production
This information is used to link the
effects of changes in the quantity or quality of the resource to changes
in consumer surplus and/or producer surplus, and thus to estimate the economic
benefits.
The method is most easily applied in two
specific cases:
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Cases where the resource in question is a
perfect substitute for other inputs. For example, increased water quality
in a reservoir means that less chlorine is needed for treating the water.
In this case, an increase in quantity or quality of the resource will result
in decreased costs for the other inputs. Thus, in this example, the benefits
of increased water quality can be directly measured by the decreased chlorination
costs.
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Cases where only producers of the final good
benefit from changes in quantity or quality of the resource. Consumers
are not affected. For example, improved quality of irrigation water may
lead to greater agricultural productivity・more crops are produced on the
same amount of land. If the market price of the crops to consumers
does not change, benefits can be estimated from changes in producer surplus
resulting from increased income from the other inputs. Thus, in this example,
the profits per acre will increase, and this increase can be used to estimate
the benefits of improved irrigation water quality.
Advantages of the Productivity Method
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In general, the methodology is straightforward.
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Data requirements are limited, and the relevant
data may be readily available, so the method can be relatively inexpensive
to apply.
Issues and Limitations of the Productivity
Method
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The method is limited to valuing those resources
that can be used as inputs in production of marketed goods.
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When valuing an ecosystem, not all services
will be related to the production of marketed goods. Thus, the inferred
value of that ecosystem may understate its true value to society.
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Information is needed on the scientific relationships
between actions to improve quality or quantity of the resource and the
actual outcomes of those actions. In some cases, these relationships
may not be well known or understood.
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If the changes in the natural resource affect
the market price of the final good, or the prices of any other production
inputs, the method becomes much more complicated and difficult to apply.
Continue to:
Method
3: Hedonic Pricing Method
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Method
1: Market Price Method
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Dollar-Based
Ecosystem Valuation Methods |