Posts Tagged ‘hidden benefits’

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A shipping lane is being proposed which would go through the Great Barrier Reef so as to improve access to a mining complex.

We must ask some questions that help decide whether the proposed lane should go through the reef or not. Who will benefit or lose out in each scenario, when, and for how long, and by how much?

In economic analysis, as £1 now is worth more than £1 in the future, future costs and benefits are discounted to create a Present Value for each impact, which you can then weigh against each other.  For a project to be recommended on economic analysis grounds only, its benefits over time need to outweigh its costs. In economic terminology Net Present Value (benefits minus costs) > 0 or Benefit Cost Ratio > 1. There are of course many other considerations in making a decision about a project that economic analysis can capture. But let’s see how we can think about this project if we were attempting to do an economic analysis (cost benefit analysis in this case).

Let’s briefly look at the case where the shipping lane does go through the reef. This will not cost the company anything extra than they had already planned. It may, however, have an economic cost to society (a negative externality); reef damage, caused by the ships, will reduce tourism in the area- a huge source of local GDP and employment in Queensland.

We can also look at the case where the shipping lane is diverted to avoid the reef. The tourist numbers and revenues don’t change, but the diversion would cost extra money to the mining and shipping companies in the form of fuel and time.

The comparison of cost of diversion and avoided damage (benefit of diversion) to the reef can conclude:

(a)    if the cost of diverting ships is less than the lost money from tourism and other marketable impacts, the shipping lane should be diverted.

(b)   if the cost of diverting ships outweighs the lost money from tourism and other marketable impacts; the direct lane should go ahead on efficiency grounds.

But hang on a minute, it’s not that simple!

We have to think about the characteristics of the reef that generate values other than the market price and revenues. It’s these social values that are not paid for in a market that are often most important to people and are what make the Great Barrier Reef, well, GREAT.

It’s not that different to what people care about when their house burns down. Do people care about the games console or the expensive pair of new jeans? No, it’s the family photos, the postcards from friends, and the paintings your son made when he was 4 years old that hang in the kitchen.

The same goes for the reef; it’s the bio-diversity, cultural heritage, national pride, the wonder and mystery, and the sheer size of it that are the most ‘valuable’.

These characteristics lead to types of value that cannot be bought, such as: Option value (I may be willing to pay to have the option to see the Reef in the future, even though I have no intention going now); Existence value (I may be willing to pay for the knowledge that the Reef exists without any intention to ever see); and Bequest value (I may be willing to pay so that my descendants can see the Reef).

By including these values, we can build a better understanding of the Total Economic Value of the Reef. ‘But how do you measure them if we can’t buy or sell them?’ I hear you cry. This is where environmental economists earn their money; they realise that these values may be hidden within the price of another good/service that is bought and sold and thus can extract it. Another method is to survey people’s preferences of different scenarios regarding the environmental asset and their associated income in each scenario.

By eliciting these values, we can monetise damage done to the reef that isn’t seen through the market and incorporate it into the decision process.

Accounting for some leeway either side, if the true cost of having a lane directly through the reef i.e. losing all values associated with reef damage, is more than the cost to companies of circumventing the reef, then there is a compelling argument that the direct lane should be shelved.

So what if, even after including these non-marketed values, the damage to the reef is less costly than the cost to the companies of bypassing it?

In reality, we can’t monetise everything and we are never 100% certain what the consequences of reef damage is in the long term; perhaps, with data only available in the future, the costs are found to be so much more than previously thought. In that case, instead of attempting to put a market value on certain attributes, we could just say that, ‘some things are critical for nature and for the people, both now and in the future, and should be protected’.

Yes, economic development may bring us monetary wealth, but perhaps we lose immaterial wealth in the process in terms of wellbeing, morals and principles. Some things are irreplaceable, and should remain that way.

Here is a link to the online petition against the lane.

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Throwing litter into bins rather than onto the street, using the stairs rather than the elevator, and recycling glass rather than throwing it away are all beneficial behaviours to ourselves and society at large.  However, a lot of the time people don’t carry out these positive behaviours, opting instead for the more negative alternatives.  Litter ends up on the street, people opt for the elevator rather than taking stairs, and glass gets thrown away in regular rubbish bins, if it even makes it to a bin.

 Economists carry out a lot of work on getting people to change behaviour and getting the incentives right to encourage behavioural change.  The Fun Theory website promotes what they call, well, the fun theory, which they describe as:

 “…something as simple as fun is the easiest way to change people’s behaviour for the better.”

 The website currently displays videos of three different projects carried out by the TheFunTheory.com that have incorporated fun into the three behaviour changes described above.  Unsurprisingly, the end results are very encouraging, with a ‘fun’ bin collecting 72kg of rubbish in a day, more than double of a nearby bin collecting 31kg of rubbish, the ‘fun’ stairs encouraging 66% more people than usual to choose the stairs rather than the elevator, and the ‘fun’ bottle bank being used by nearly 100 people, while a nearby conventional bottle bank was used just twice.

Of course there are the usual caveats, with the numbers from the nearby rubbish bin and bottle bank suffering from displacement activity as people chose to deposit their rubbish and glass into the ‘fun’ alternatives (I can also imagine some people running home for their empty bottles they were saving to bulk dump for another day to try out the ‘fun’ bottle bank that evening), and the expected lower numbers of users once the novelty runs out. 

Despite the disclaimers however, the theory is still intriguing, with ‘fun’ being used here as an economic factor to incentivise behavioural change.  It’d be interesting to test out the numbers against more conventional incentives such as offering people a small amount of money instead.  For example, if offering people 5p per bottle deposited at the bottle bank achieves the same bottle deposit results as we’ve seen at thefuntheory, this will give a lower bound estimate of the value of thefuntheory invention (the estimate is a lower bound because while the bottle deposits are accounted for, the ‘hidden benefit’ of the social interaction between the various users and bystanders is not accounted for).

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There is a scene in Don Quixote where the eponymous hero first sets eyes on a majestic line of 30 or 40 windmills in the distance.  Excitedly he turns to his loyal sidekick and announces his intention to slay every single one of them.  He had, of course, mistaken them for giant enemies.

When William Kamkwamba first set eyes on windmills on the cover of a library textbook, he saw not enemies, but inspiration.  Just 14 and without a full education (due to a severe famine in 2001 his parents couldn’t afford to keep him in school), William managed to hack together pieces of wood, PVC piping, old bicycle parts and a rusty car to build himself a working windmill!  He has since built 2 more which power lights, charge mobile batteries, and pump water for the house and to irrigate fields.

I find William’s story completely inspiring in so many ways.  Having grown up in developing countries I have always been interested in international development and the fact that with very little help a 14 year old has managed to change the future of his village completely floors me and fills me with immense hope.  I love the fact that William didn’t let his circumstances tie him down, I love the fact that with his determination he has not only improved his life, but the lives of his fellow villagers, I love the inspiration that this story must give to people in other developing countries.  I especially love that William built windmills, harnessing renewable energy for his village, therefore ensuring that their energy supply was not dependent on resources from the outside.

So what were the costs of building the windmills?

  • 3 months of William’s life, during which he was called a pot-smoking madman by the other people in his village.
  • Windmill parts – these were all scrap parts, so the only real cost here is the time spent looking for these parts which have been included above.

What were the benefits to William and his family and neighbours from the construction of the windmills?

  • Free electricity – dependent only on nature’s forces and not on unreliable infrastructure or deliveries of fuels.  This benefit includes the ability to study/work longer – In building his first windmill William’s main ambition was to power a lightbulb in his room so he could read after dark.  Studies have shown that the supply of electricity increases GDP due to individuals being able to work and study after dark[1].  There are also many studies on how mobile phones in rural areas contribute to better economic conditions[2].
  • Better health for William and his family – William was able to replace his family’s smoky dark kerosene lamps with lightbulbs.  One of his windmills was also used to pump clean water into the house.
  • Greater food reliability – Another windmill pumped grey water out to irrigate the family fields, helping to ensure that farm production could continue even in times of droughts.
  • Inspiration – Even holding a master of science, William’s windmills inspire me and remind me that it is possible to do pretty much anything you can put your mind to.  Imagine how it must make the people of his village and surrounding villages feel!  I would not be surprised to see some sort of entrepreneurial growth in the area around William’s village.

Read more at Wired.com and William’s blog. Watch William on TED

[1]Wolde-Rufael, Yemane 2006. Electricity consumption and economic growth: a time series experience for 17 African countries. Energy Policy 34:10 (1106-1114)

Ferguson, Ross; Wilkinson, William; Hill, Robert, 2000. Electricity use and economic development. Energy Policy 28:13 (923-934).

[2]Bayes, Abdul, 2001. Infrastructure and rural development: insights from a Grameen Bank village phone initiative in Bangladesh. Agricultural Economics 25:2 (261-272)

Google Scholar search: Mobile phones economic development

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