John B. Braden University of Illinois at Urbana-Champaign
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Transcript of John B. Braden University of Illinois at Urbana-Champaign
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John B. Braden University of Illinois
at Urbana-Champaign
Economic Modeling for Water Resources
NSF Interdisciplinary Modeling Workshop – July 2005
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NSF Interdisciplinary Modeling Workshop – July 2005
Thanks:
Laurel Saito Heather Segale Xiaolin Ren
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NSF Interdisciplinary Modeling Workshop – July 2005
Contributions of Economics Understand Behaviors
– Responses to institutions & policies– Market power (size, information)– “Positive” analysis
Design Institutions & Policies– Benefit/cost analysis– Planning for behaviors– “Normative” analysis
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NSF Interdisciplinary Modeling Workshop – July 2005
Limitations of Economics
Anthropocentric Utilitarian Statistical Allocational (efficiency) Material
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NSF Interdisciplinary Modeling Workshop – July 2005
Economic Modeling
Theory – generate hypotheses
Econometrics – test hypotheses
Operations Research – simulate outcomes– optimize complex systems
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NSF Interdisciplinary Modeling Workshop – July 2005
Outline of Presentation
1. Basic Economic Models2. Pricing Aquatic Ecosystems3. Hydro-Economic Models4. Bio-Economic Models5. Benefit-cost Analysis6. Risk and Uncertainty7. Summary Remarks
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NSF Interdisciplinary Modeling Workshop – July 2005
Resources for Lecture
Griffin, R.C. Water Resource Economics. MIT Press (forthcoming)
Young, R.A. Determining the Economic Value of Water. Resources for the Future (2005)
Other books & articles on website
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NSF Interdisciplinary Modeling Workshop – July 2005
1. Basic Economic Models
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NSF Interdisciplinary Modeling Workshop – July 2005
Agent Models
Consumers Maximize Utility Max u(Y,w) , uy, uw > 0
uyy, uww < 0
s.t. PYY + pww < B
Producers Maximize ProfitMax π = p1y1 – Σi cixi – cww
s.t. y1 = f(X, w) , fx, fw > 0;
fxx, fww < 0
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NSF Interdisciplinary Modeling Workshop – July 2005
Marginal Analysis
Marginal benefits = incremental demand price
Marginal costs = incremental supply price
Operating returns vs. fixed costs
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NSF Interdisciplinary Modeling Workshop – July 2005
Supply Model – Input Choice
W
X
CSlope
C
01y
21y
11y
W
X
X
W
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NSF Interdisciplinary Modeling Workshop – July 2005
Supply Model – Output
1P
1y 1y
1P1
1
( , )X W
CS C C
y
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NSF Interdisciplinary Modeling Workshop – July 2005
Aggregate Supply
1y
1P
1pS 1
qS 1AggS
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NSF Interdisciplinary Modeling Workshop – July 2005
Demand Model
1 11
( , , )D
d P P BP
1y
1P
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NSF Interdisciplinary Modeling Workshop – July 2005
Aggregate Demand
1y
1P
1bd1
ad 1Aggd
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NSF Interdisciplinary Modeling Workshop – July 2005
Nonrival (“Public”) Goods
Rival – Ordinary goods that only one person can consume
Nonrival – Goods that can be consumed by many simultaneously– Excluability allows pricing
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NSF Interdisciplinary Modeling Workshop – July 2005
“ Public Goods” & Economic Value
azd
bzd Agg
zd
zP
z
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NSF Interdisciplinary Modeling Workshop – July 2005
Markets
Producers offer good & buy inputs
Consumers bid for goods & supply labor
Prices coordinate producers & consumers– Output markets (py, pw)
– Input markets (ci, cw)
– Parametric to individuals
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NSF Interdisciplinary Modeling Workshop – July 2005
Market Model
1y
1P1aggS
1aggd
1My
1MP
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NSF Interdisciplinary Modeling Workshop – July 2005
Welfare Analysis (normative)
Maximize Net Benefits– “Consumer surplus”– “Producer surplus” [returns to
owners & fixed inputs]
Competitive Equilibrium Social Optimum
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NSF Interdisciplinary Modeling Workshop – July 2005
Welfare Analysis – Economic Surplus
Consumer Surplus
Producer Surplus
WP
W
WS
WD
*W
*WP
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NSF Interdisciplinary Modeling Workshop – July 2005
2. Pricing Aquatic Ecosystems
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NSF Interdisciplinary Modeling Workshop – July 2005
The Diamond-Water Paradox
Diamond fetch very high prices, although they have limited usefulness. Water is essential to life, but fetches very low prices.
WHY?
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NSF Interdisciplinary Modeling Workshop – July 2005
Total vs. Marginal Value -- Water
W
Value
WMV
WTV
WP
AggWS
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NSF Interdisciplinary Modeling Workshop – July 2005
Total vs. Marginal Value -- Gems
G
Value
GMV
AggGS
GP
GTV
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NSF Interdisciplinary Modeling Workshop – July 2005
Answering the Paradox
Water: Adequate supplies produce low marginal value (even though basic water needs are highly valued).
Diamonds: Limited supplies
produce high marginal value.
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NSF Interdisciplinary Modeling Workshop – July 2005
Pricing Aquatic Ecosystems
Whole vs. components
Value vs. supply cost
Use vs. nonuse
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NSF Interdisciplinary Modeling Workshop – July 2005
Models for Valuing Ecosystems
Market-based (Revealed Preferences): – Expenditures on services – fish & fishing;
whale watching – Opportunity cost of laws –Lagragian
multipliers on constraint functions – Replacement cost
Experiment-based (Stated Preferences): – Trade-offs between service levels & prices– Willingness to support tax referenda– Expressed willingness to pay
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Value of ∆ Fishery Quality
fP
f
2( , )fD P Q
1( , )fD P Q
*fP
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Value of Wetlands (Earnhart, Land Econ., 2001)
Hedonic housing value – price differentials for homes adjacent to restored wetland vs. not adjacent to any distinct features– Proximity to L.I. Sound, river, stream ~ + 3%– Proximity to restored marsh ~ +16%– Proximity to disturbed marsh ~ -13%
Conjoint choice – selecting between hyp. homes differing in amenities & price – All values ~ 80 – 120%
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: “The Value of the World’s Ecosystem Services & Natural Capital” (Costanza et al., Nature, 1997)
Benefits transfer – borrow marginal values from literature and apply them to increments to env. quality or natural resources
Multiply by total quantity of natural resources
Total value ~ $33 trillion
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: “The Value …” Critique
“Serious underestimate of infinity.”
Total value vs. marginal value– Tools best applied to small changes from
status quo
Double - counting
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NSF Interdisciplinary Modeling Workshop – July 2005
3. Hydro-Economic Models
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NSF Interdisciplinary Modeling Workshop – July 2005
Hydro-economic Topics
Dam management balancing hydropower, recreation, ecological benefits
Administered water allocation Policy-simulation, e.g.,
– Auctioned access to locks– Targeted NPS abatement– Instream flow management– Economic forecasting of land
use/hydrologic change
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Downstream Impacts of Development (Johnston et al. JWRPM, 2006)
Determine the downstream economic value of low-impact development:
Identify impact categories (flooding, water quality,…)
Use weather series & HSPF to compute stage, flow, and flood frequencies for different development scenarios
Attach typical “prices” to impacts Calculate economic impact of each scenario Engineering costing of each scenario
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Spatial Management of Ag. Pollution (Braden et al., AJAE, 1989)
Max π = Revenues – Costss.t. Crop production functions
Spatial pollution transport functions < T*Identifies actions (crop, tillage)
by location that minimize economic losses
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NSF Interdisciplinary Modeling Workshop – July 2005
Hydro-economic Challenges
Scale: Markets vs watersheds Time: Water cycles vs
Economic cycles
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NSF Interdisciplinary Modeling Workshop – July 2005
4. Bioeconomic Models
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NSF Interdisciplinary Modeling Workshop – July 2005
Bioeconomic Topics
Fisheries management Floodplain & wetlands
management Forecasting landscape change
and effects on ecosystems
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Efficient Protection of Fish Habitat (Braden et al., WRR, 1989)
Max π (crops, tillage, pesticides)
s.t. Prob {HSI (sed., chem.) > H*} > R
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Economic/Runoff/Fish/Model
[Braden et al., WRR, 1989]
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Cost/Habitat Suitability
[Braden et al., WRR, 1989]
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NSF Interdisciplinary Modeling Workshop – July 2005
Fish Habitat: Discharges vs. Impacts (Braden et al, AJAE,
1991)
Impact Targets:Min C(x) s.t. Pr{q(x,h[x],ε)>Q} > A
Q = Habitat Qual., A = reliability
ε = stochastic factorDischarge Standards (Proxy):
Min C(x) s.t. Pr {h(x) > H} > Bh intermed to q; H linked to Q
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Habitat Impacts vs Discharges
[Braden et al., AJAE, 1991].
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NSF Interdisciplinary Modeling Workshop – July 2005
Example: Floodplain Management for Crops and Fish in Bangladesh (Islam & Braden, Env. Devel. Econ., 2006)
MaxHi Σc,t φtNRcit*Hcit + Σf,t φtNRfi(qfit)*Hfit
s.t. ΣcHci + Σf Hfi < H all t [area]
qfit = gfit(Hfit) [nonlinear production]
Differentiates production functions by land capability, crop, and species types
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NSF Interdisciplinary Modeling Workshop – July 2005
Floodplain Model Implementation
Fourier analysis (econometric) simulation of flood levels
Monthly average water levels -> flood coverages w/ digital elevation model
Land capabilities identified Capabilities changeable with levees Optimize land allocations to
activities by max economic returns
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NSF Interdisciplinary Modeling Workshop – July 2005
Bioeconomic Modeling Challenges
Matching spatial and temporal scales
Model complexity Simplifications that lose
information (e.g., averaging)
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NSF Interdisciplinary Modeling Workshop – July 2005
5. Benefit-Cost Models
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NSF Interdisciplinary Modeling Workshop – July 2005
Policy Analysis
Maximum Net Benefits– Potential Pareto Optimality – costs not
actually compensated– Function of existing distribution
Discounting– Opportunity cost of time
Max NPV =
Σt { (Benefits)t - (Costs)t} (1 + r)t
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NSF Interdisciplinary Modeling Workshop – July 2005
6. Risk and Uncertainty
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NSF Interdisciplinary Modeling Workshop – July 2005
Sources of Variability
Weather Ecological dynamics Geology/geography/
topography Technology Households Culture Economy
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NSF Interdisciplinary Modeling Workshop – July 2005
Modeling Variability
Statistical confidence intervals Monte Carlo simulation
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NSF Interdisciplinary Modeling Workshop – July 2005
Challenges
Interactions of systems Differences in scale & detail Structural change Pure uncertainty
– Precautionary principle
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NSF Interdisciplinary Modeling Workshop – July 2005
7. Summary Remarks
Economics adds people -- systematically
Total value vs. price & cost Integrating role Different disciplinary scales
and time-frames challenge integration