Economic Evaluation of Recreational Fishery Policies

Chapter 3 Economic Evaluation of Recreational Fishery Policies Murray A. Rudd, Henk Folmer and G. Cornelis van Kooten Abstract Recreational fisheries around the world provide humans with important economic benefits because people derive well-being from participating in the act of fishing. Many of these benefits are difficult to value, however, because they are nonmarket in nature and depend on ‘free’ ecological services. Other sectors of society may also depend on these public goods. It is difficult to exclude people from using public goods and there is, therefore, a tendency for them to be under-produced by the private sector. Thus, there is often a need for government policy intervention to ensure the adequate production of public ecological services and resolve conflicts over their use. Policies that affect recreational fisheries have costs and benefits, both for anglers and people in other sectors of society, that must be accounted for if social well-being is to be maximised. Economics can be used to quantify the costs and benefits of various policy options available to society, and make recommendations that improve overall economic efficiency. Overall well-being (welfare) consists of the sum of ‘surpluses’ accruing to producers and consumers. In this chapter, we outline the principles of economic cost–benefit analysis of market and nonmarket values for recreational fisheries using examples from various jurisdictions. We also consider how economic analysis can be used to account for the transaction costs of fisheries management – costs often borne by society as a whole – for different forms of governance. Key words: cost–benefit analysis, nonmarket valuation, policy analysis, recreational fisheries, sport fishing. Introduction Marine and freshwater ecosystems around the world provide humans with important recreational fisheries that generate revenue and employment, particularly in rural and developing regions. They provide economic benefits to people who derive pleasure from participating in the act of fishing, enjoying the natural environment, viewing marine wildlife, consuming the fish they catch, and/or engaging in social interactions with fishing companions. Economics is the study of how individuals and societies make choices about the use of scarce resources to maximise overall well-being. It plays a key role in efforts to evaluate the merits of policies that directly or indirectly impact recreational fisheries throughout the world. Using econom- 03phch3.indd 34 10/15/01, 4:47 PM Economic Methods 35 ics, the costs and benefits that accrue to recreational fishers and the suppliers that provide recreational fishing equipment and services can be compared under various policy options. The healthier an ecosystem, the more that ecosystem can provide a ‘flow’ of fish that yields fishers increased satisfaction and well-being. Ecosystem services (see Costanza et al. 1997) typically have public good characteristics that provide benefits to those that use the resource but do not bear the full cost of providing healthy ecosystems. The private sector generally does not produce enough public goods from an economic efficiency or social well-being standpoint, because it is not in any economic agent’s best interest to supply such goods. Individuals have an incentive to ‘free-ride’ by letting others bear the costs of providing the public good. In response to shortfalls in the production of public goods and conflicts between various interest groups, governments can respond with policy initiatives that prescribe or influence private behaviour by setting rules that prohibit, require, or permit specified actions designed to increase the supply of public goods. Several types of policies have been implemented to improve recreational fisheries. One consists of putting caps on commercial fishing in order to improve the quantity and quality of stocks available for recreational fishing. Another is aimed at improving the ecological conditions for the recreational fish stocks, such as improving water quality. Both types of policies imply benefits and costs for both recreational fishers and others. In the former case, the costs may include income reductions and employment losses in commercial fisheries. In the latter case, the costs relate to such issues as water purification. A prerequisite for implementing a given policy should be that its benefits outweigh its costs. One of the methodologies that has been developed in economics to assess policies is cost–benefit analysis (CBA). Predicting the impacts of alternative policies on overall well-being requires that policy makers consider the incentives individuals and organisations face, and how policy initiatives affect the costs and benefits associated with alternative behaviours. Economic considerations play an important role in policy design, with CBA routinely used to account for the economic costs and benefits of particular projects or policy options (Johansson 1993, van Kooten and Bulte 2000). Beyond fulfilling an accounting function, economic analysis can play an additional role in helping decision-makers understand how incentives affect different agents and lead to political mobilisation and lobbying. The general principle of CBA is that a policy is worthwhile and should be pursued if the discounted benefits of a particular policy exceed its discounted costs. Implementing this broad principle is problematic because governments, like individuals, face budget constraints. Priority should be given to projects and programs that maximise social welfare, thus enhancing overall economic efficiency. Further, market prices do not always reflect economic values where natural resources are concerned; prices often underestimate a resource’s true value or fail entirely to take the natural amenity into account. This leads to the misallocation of resources. This is the case, for example, with the systematic over-use of a marine ecosystem for commercial fishing in regions with ecosystems that are important for recreational fisheries. The main objective of this chapter is to outline the basic principles of CBA for applications related to recreational fishery policy analysis, using examples from various jurisdictions. When considering the demand side of the economic analysis, we emphasise the need to consider nonmarket values in CBA. For both producers and consumers, it is important to differentiate between financial and economic analyses: our basic contention is that narrow 03phch3.indd 35 10/15/01, 4:47 PM 36 M.A. Rudd, H. Folmer and G.C. van Kooten financial assessments do not give an accurate accounting of the real economic benefits of recreational fishing, nor the true costs of providing the public ecosystem services needed to support recreational fisheries. There is a pressing need for economic concepts to be applied in environmental policy analyses if countries around the world are to reap the rewards of developing or maintaining vibrant recreational fisheries. Economic policy analysis Changes in the economic well-being of producers and consumers are the focus of economic analysis. Economic well-being includes financial measures, but is more encompassing. For example, it includes nonmarket benefits related to the camaraderie experienced while participating in recreational fishing, plus benefits from knowing that an ecosystem is protected (existence value). Measuring the nonmarket values of recreational fishing can be difficult, but this does not mean that such benefits should be ignored in policy analyses, as these values can be substantial. In Scandinavia, for instance, Kristrom and Johansson (2001) estimated that the recreational benefits from recreational salmon fishing outweigh the net benefits from commercial salmon fishing at sea. Taking account of all components of economic value can have important policy implications for recreational fisheries and the ecological systems that support them. Economic efficiency refers to the maximisation of social welfare, which is the sum of the ‘surpluses’ accruing to producers and consumers. A surplus is simply the difference between total benefits and total costs, appropriately discounted to take into account the fact that surpluses accrue at different time periods. Producer surplus is simply given by the area above the supply curve and below price. Price multiplied by quantity gives total return, while the area under the supply (or marginal cost) curve for that quantity gives total (variable) cost. The difference is the producer surplus or quasirent (see van Kooten and Bulte 2000). Likewise, the area under the demand (or marginal benefit) curve represents the total benefits to consumers of consuming a given quantity, while price multiplied by quantity purchased represents total cost or expenditure. The difference is referred to as consumer surplus. Consumer surplus can readily be calculated for market goods when data are available (i.e. the price of the good, the prices of substitutes, consumer income levels). This is not true, however, for amenity services such as outdoor recreation and ecosystem functions that are nonmarket in nature and not traded in established markets. Consumer surplus for recreational services can be estimated in situations where the recreational activity impacts a market transaction. There are travel cost techniques, for example, that enable the analyst to estimate a demand curve for some recreational activities (e.g. hunting, fishing, camping), and thus consumer surplus [see Duffield et al. 2002 for an example – eds]. The hedonic pricing method does the same, but there are difficult statistical problems to overcome (see Freeman 1993). Willingness to pay (WTP) for increases in the availability of an amenity or willingness to accept (WTA) compensation to forgo an increase (or decrease) in the availability of a natural resource are more appropriate concepts, compared to consumer surplus, when addressing consumer well-being arising from certain nonmarket amenities. The theoretical foundation for these concepts is illustrated with the aid of Fig.·3.1. Suppose an individual has total income M which is allocated to the purchase of market goods and services qi (i·=·1, …, n) at prices pi 03phch3.indd 36 10/15/01, 4:47 PM Economic Methods 37 Composite Commodity [Income Level M in $] (i·=·1, …, n). Amount q(0) of the public good (the environmental amenity) is initially available, so the individual is located on her indifference curve, V(0), at the point where she is consuming M amount of market goods and q(0) of the environmental amenity. Suppose a policy proposes to increase the availability of the environmental amenity from q(0) to q(1) in Fig.·3.1. There are two candidates for the measure of consumer well-being, depending on the presumed property rights. The compensating surplus (CS) assumes the ‘consumer’ of the environmental amenity has the right only to V(0) – that is, q(0). An increase in Q to q(1) will enable the consumer to reach a higher level of utility on indifference curve V(1). The CS is the change in income required to restore the original level of utility, V(0), but with q(1) rather than q(0) (see Fig.·3.1). It is the maximum amount the person is WTP for the opportunity to face q(1) rather than q(0). The equivalent surplus (ES) assumes the consumer has a right to q(1) in Fig.·3.1. Then ES is the minimum income that would have to be given to the consumer for her to forgo the increase in the public good – the WTA compensation. In theory, WTA should be approximately equal to WTP, but in practice WTA has been shown to be substantially larger than WTP (Mansfield 1999). Of course, this has implications for CBA – benefits of a policy to enhance environmental values are higher if WTA is used rather than WTP. Cost–benefit analysis requires that all costs and benefits be accounted for in each period over a relevant time horizon. Future costs and benefits are discounted at rate r to reflect time preferences for income (e.g. $100 received 5·years in the future is worth less than $100 received today; the higher the interest rate, r, the less the current worth of $100 received in the future). The costs and benefits used in CBA are marginal values in the sense that a policy change does not have economy-wide price effects – that the project is small relative to the overall economy. If this is not true, more complicated general equilibrium analysis is re- ES M = Σ piqi M CS V(1) V(0) 0 q(0) q(1) Quantity/Quality of Non-Market Environmental Good, Q Fig. 3.1 Consumer welfare measures, compensating surplus (CS) and equivalent surplus (ES), for a nonmarket environmental good, Q. Consumption of the nonmarket good is determined by consumer income, M, the prices (pi) of market commodities qi, the indifference curves indicating trade-offs for market, V(0), and nonmarket, V(1), consumption, and property rights. 03phch3.indd 37 10/15/01, 4:47 PM 38 M.A. Rudd, H. Folmer and G.C. van Kooten quired. Further, when distortions exist in other markets, adjustments should be made to costs and benefits so that they reflect true economic value (see van Kooten and Bulte 2000 for a further discussion of ‘shadow prices’). The streams of costs (Ct) and benefits (Bt), discounted at rate r over T periods, can be summed, respectively, into the present value of costs (PVC) and benefits (PVB): To address government budget constraints (not every project with PVB·>·PVC can be implemented) and achieve maximum economic efficiency, it is useful to rank projects by their benefit–cost ratios: Projects ranked by their benefit–cost ratios are chosen in order until the budget is exhausted. There are a number of philosophical and pragmatic difficulties that arise when using CBA, but these are beyond the scope of this chapter. For general introductions or reviews of key issues, see, for example, Arrow et al. (1993), Freeman (1993), Hausman (1993), Hausman and McPherson (1996), Foster (1997), Dixon and Pagiola (1998), Pearce (1998), Weimer and Vining (1998), and van Kooten and Bulte (2000). Suffice to say that there are difficulties in (1) equating personal satisfaction with welfare and income, (2) putting economic values on public goods such as ecosystem services, (3) choosing an appropriate discount rate, and (4) addressing income redistributional effects of policies where there are identifiable losers in the policy implementation process. The last point is problematic because the generic goal in economics is Pareto efficiency – no one person can be made better off without making at least one person worse off. Pragmatically, achieving this is usually impossible, so the Kaldor–Hicks compensation principle is generally invoked: if the ‘winners’ from a policy change gain more than the ‘losers’ lose; they could compensate the losers and still be better off. Society as a whole is left better off but, because compensation rarely occurs, some individuals are left worse off than they were prior to the policy (Hausman and MacPherson 1996). Economic efficiency is only one criterion by which a policy or project can be judged. Other possible criteria include equity (redistribution of income according to social goals), fiscal equivalence (the beneficiaries of policies are the ones who bear the costs), administrative efficiency and accountability (of elected officials and bureaucrats), conformance to general norms and social values, and the adaptability (to changing social or ecological conditions) of institutions themselves (e.g. Ostrom et al. 1993, Weimer and Vining 1998). However, as Pearce (1998) points out, alternative decision rules appear to suffer as many, if not more, shortcomings as those faced by CBA. 03phch3.indd 38 10/15/01, 4:47 PM 39 Economic Methods Applying economic concepts to recreational fisheries policy analysis Standard CBA calculates the economic costs and benefits of proposed policy alternatives for producers and consumers. Using recreational fisheries examples, we briefly illustrate the concepts that arise in undertaking research on supply-side producer surplus benefits and demand-side consumer surplus benefits. Recall that the value of a nonmarket amenity to a consumer depends on property rights and on a policy intervention to change the level of the environmental amenity being supplied. In some cases, the cost of a policy intervention can be calculated in a straightforward manner, but in other cases the costs of implementing policies that achieve the same ends can vary greatly, depending on the type of government or market organisation providing the amenity. All three components – consumer benefits, producer benefits and the costs of policy implementation – should be accounted for in economic policy analyses if social well-being is to be maximised. The economic value of recreational fisheries to producers Although producer surplus is theoretically easier to measure than consumer surplus, there has been very little economic research on recreational fishery service providers. Almost all work done in this field constitutes financial analyses of overall expenditures on fishing services – calculation of the price multiplied by quantity for services such as charter trips, boat rentals, accommodation, fishing supplies, and so on. Expenditures are not a surplus, and thus are not a benefit measure. Therefore, unless industry costs are quantified for specific recreational fisheries, estimates of producer surplus are not available. Some research in the USA has gone beyond simple studies of expenditures and has assessed the operating costs of charter operators. An ongoing study of Lake Erie sport charter captains in Ohio (Lichtkoppler and Hushak 2001) examines average operating costs, cash flow and net profitability for walleye (Stizostedion vitreum, Percidae) charter fishing. The researchers do not explicitly calculate producer surplus but the information they collect could be used for that purpose. They found that many charter captains, particularly those that conducted less than 41 trips per year, encountered financial difficulties. This implies low producer surplus in the sector because many charter operators are likely just covering variable costs, if at all. Another effort is currently underway by the US National Marine Fisheries Service and the Pacific States Marine Fisheries Commission (PSMFC) to remedy some of the shortcomings in the analysis of charter boat economics. New research (D. Colpo, PSFMC, personal communication) is being implemented that will survey 500 to 600 active charter boat operators on the US West Coast. Data about randomly selected day trips and annual costs will be collected from the business owners; this information can then be used to develop further insights about the financial impacts of the charter industry and economic estimates of producer surplus based on industry operating costs. The economic value of recreational fisheries to consumers Any particular fishing trip can be viewed as a bundle of physical and service attributes (e.g. target species size and abundance, experience of the guide, type of boat used, number of other 03phch3.indd 39 10/15/01, 4:47 PM 40 M.A. Rudd, H. Folmer and G.C. van Kooten people on the trip, accommodations, price of trip). Each attribute may have an influence on the value that a person holds for the fishing trip, but in different ways because individuals have different preferences and incomes. Individuals, including those who do not engage directly in recreational fishing activities, may also derive well-being and economic value from policies that directly or indirectly benefit recreational fisheries. For instance, fishers and nonfishers alike might experience an increase in well-being if they know policy is adopted that preserves essential fish habitat needed to protect an endangered species. The main components [variants] of economic value that ideally should be considered in CBA include (see Dixon and Pagiola 1998 for an overview): extractive use value (e.g. fish taken as food or trophies by recreational fishers) • Direct Direct use value (e.g. nonlethal catch-and-release, wildlife viewing) • Indirectnonextractive use value (e.g. the value provided by preserving key predatory fish that maintain • overall ecosystem balance) and quasi-option value (i.e. the value of future direct and indirect use value and • Option information) nonuse value (i.e. the value derived from knowing that future generations will be • Bequest able to fish even if the person holding this value does not fish themselves); and nonuse value (i.e. the value that people derive from knowing fish exist even if • Existence they have no plans to fish themselves) Valuing extractive direct use for recreational fisheries There is a substantial market demand for fish as food in some recreational fisheries. In 1999, for example, marine recreational fishers in the United States kept almost 135 million fish, about 41% of the 329 million pounds (90·000 tonnes) landed in total (NMFS 2000). For some high-quality species, such as dolphin fish (Coryphaena hippurus, Coryphaenidae), as much as 90% of the fish landed (1.85 million pieces) was kept by anglers, and total recreational landings exceeded those from the commercial fleet. In Florida, anglers on multiday trips with fishing charters where dolphin were popular each paid an average of US$246 per day for the charter and $96 per day for travel and lodging (NMFS 2000). Up to 11% of Florida fishers on multiday trips also take some time off work, which costs them, on average, another $195. The opportunity cost of fishing is calculated as the foregone or shadow wage anglers could have earned if they had stayed at work; in recreational economics, opportunity cost is sometimes charged at half the wage rate in recognition of a less than one-to-one correspondence between recreational and work opportunities (Freeman 1993, pp.·451–52). Clearly, dolphin fish landed in the sport fishery are not ‘cheap’ fish. The average price of frozen dolphin fillets imported into the USA during 2000, by contrast, was about $4.35 per kg (or about $2.50 per kg for whole fish, allowing for processing costs and waste). The difference between the sport and commercial fishery illustrates that other nonextractive values strongly influence the value of dolphin to sport fishers, and that a fish landed by a recreational fisher is often ‘more valuable’ than the same fish caught in the commercial fishery (see also Kristom and Johansson 2001). This example is based on a financial analysis of expenditures, 03phch3.indd 40 10/15/01, 4:48 PM Economic Methods 41 however, and does not give an accurate estimate of economic welfare. Expenditures by anglers for hotels, restaurants, charter operators and so on provide revenue to firms supplying the recreational fishing industry; the actual surplus accruing to these suppliers depends on their cost structures and the opportunity cost of labour. To expand on the contrast between expenditures and economic value, consider a study of the Costa Rican billfish recreational fishery during the 1993–94 season (Ditton and Grimes 1995). Total direct expenditures by foreign fishers in Costa Rica were calculated at $3446 per trip (average length of 7·days with 4·days fishing). A total of 15·970 billfish were landed during an estimated 5219 charter trips (approximately 97% of these fish were released live and could be caught again). The financial impact on the national economy was almost $17.8m as a result of the recreational fishery. This value, however, captures neither consumer nor producer welfare. Fishers were willing to pay even higher than market prices for the high-quality fishing experience in Costa Rica: a survey indicated that anglers had a consumer surplus of $1777 per trip, or total consumer surplus of $3.99m. This consumer surplus would need to be added to earnings over and above variable costs (i.e. producer surplus or quasirent) to get total benefits. The sum of consumer and producer surplus (or total welfare) would likely be only slightly above $4.0m because producer surplus is probably small. Much of the $17.7m in revenue for suppliers would likely be used to cover the variable costs of business operations in the competitive tourism and charter sectors in Costa Rica. Valuing nonextractive direct use for recreational fisheries How do we put an economic value on the increased well-being that fishers derive from the fishing experience? There are several ways to infer this value: observing changes in the value of property rights; examination of actual behaviour (often travel cost expenditures) when fishing sites vary by some key attribute(s); and conducting surveys of fishers’ stated preferences – that is, elicitation of WTP or WTA directly. The valuation of nonuse goods and services (i.e. bequest and existence values) can also be approached using stated preference methods (see Freeman 1993 and Shechter 2000 for general overviews of nonmarket valuation methodologies). Where there are private property rights to provide recreational services, the value of the property right should reflect the sum of discounted future net economic benefits accruing to the owner of the property right. In Australia, for example, there is a licensing system for tourism operators in the Great Barrier Reef Marine Park (Davis and Gartside 2001). The operators pay a nominal licence fee for a 6-year permit to use the park, but the number of licences issued is limited and the licences are transferable among operators. Thus, the licence has become a valuable property right that is reportedly worth up to A$100·000 in prime tourism areas. Like commercial fishing quota, changes in the anticipated revenue stream or interest rates affect the value of the licence. Likewise, environmental degradation within the park would be expected to affect adversely the trading price for the licence. The magnitude of the change in property right value is an indicator of the economic value of environmental quality. A more common approach to evaluate market demand for recreational fisheries is based on the travel cost method (TCM). The TCM uses surveys to elicit revealed preferences of fishers and estimate the value of recreational experiences not priced in markets. Essentially, 03phch3.indd 41 10/15/01, 4:48 PM 42 M.A. Rudd, H. Folmer and G.C. van Kooten the number of visits to a particular fishing site serves as a proxy for quantity, and costs (travel and opportunity cost of time) as a proxy for price, in the statistical analysis. Economic benefits are then calculated as an area under the appropriate estimated demand function. For example, Layman et al. (1996) estimated that consumer surplus for salmon fishing in the Gulkana River, Alaska was between $15 and $104 per person per day using TCM in combination with other valuation methodologies. While TCM is commonly used to value outdoor recreation, there are difficulties in apportioning costs and benefits for multiple-purpose holiday fishing trips, and in valuing the opportunity cost of fishers’ time. Alternatively, fishers can be queried regarding their ‘stated preferences’ and asked directly about their willingness to pay for certain attributes; this approach is usually employed to value preservation and other attributes that leave no trace in markets. The contingent valuation method (CVM) is used to elicit WTP or WTA compensation for changes in the availability of an amenity (Hanemann 1984). An alternative is the choice experiment (Adamowicz et al. 1998), which seeks to value different attributes of the fishing experience by querying people directly about preferences using surveys. Choice experiments are a variant on conjoint analysis, which was developed for marketing research. Whereas CVM asks respondents whether they are willing to pay a fee to improve environmental quality, conjoint surveys ask respondents to make a choice between, or rate their relative preference for, two different product profiles. Price is one of the attributes included in each profile; this provides the basis by which to assess WTP. Contingent valuation method has been used extensively to value environmental goods and services, including increases in the populations of fish stocks and environmental quality important for recreational fisheries. For example, CVM has recently been used to evaluate recreational fishers’ WTP for five popular fishes, snapper (Pagrus autratus, Sparidae), kingfish (Seriola lalandi, Carangidae), kahawai (Arripis trutta, Arripidae), blue cod (Parapercis colias, Odacidae) and rock lobster (Jasus edwardsii and Jasus verreauxi, Palinuridae). These fish have both consumptive use and nonconsumptive use values, although snapper and blue cod are primarily valued as food fish and kingfish are valued most highly as sport fish. Table·3.1 summarises the catch and value of the five species based on a survey by the South Australian Centre for Economic Studies (Williamson 2000). Marginal WTP for kingfish, kahawai and rock lobster are based on fish caught (fishers indicated that the species were just as valuable for sport purposes as for eating), while figures for snapper and blue cod were based on fish kept (their primary value was for eating – marginal WTP for a fish released to the wild was assumed to be zero). Table 3.1 Recreational landings and fishers’ willingness to pay (WTP in US$) for catching five species of recreation fish in New Zealand (from Williamson 2000). Marginal WTP is the value of an additional animal caught (kahawai, lobster and kingfish) or kept (blue cod and snapper). 03phch3.indd Species Number caught (thousands) Biomass caught (tonnes) Total value (US$m) Average WTP (US$/fish) Marginal WTP (US$/fish) Blue Cod Kahawai Snapper Rock Lobster Kingfish 1200 1100 4300 534 74 1518 729 3229 313 382 13.80 30.53 62.35 12.12 6.30 11.50 27.75 14.50 22.70 85.12 0.76 1.62 2.70 3.07 9.29 42 10/15/01, 4:48 PM Economic Methods 43 The use of various conjoint methods to value environmental quality is a more recent development in environmental economics and applications to recreational fisheries are limited to date. A study in New England by Roe et al. (1996) estimated the compensating surplus for a variety of Atlantic salmon management alternatives. They found that recreational salmon licence holders in Maine were willing to pay between $30 and $178 per day for policy initiatives that improved fishing quality by increasing run size from approximately 3000 fish to either 6000 or 10·000 fish. In the Turks and Caicos Islands, paired-comparison conjoint analysis was used to assess the impact of the abundance of spiny lobster, sea turtles and reef sharks on the willingness of dive tourists to pay for dive charters (Rudd, in press). Market share for dive charters increased significantly in simulations when divers observed more of all three types of macrofauna, demonstrating that divers held nonextractive economic value for viewing marine wildlife. Farber and Griner (2000) used conjoint analysis in conjunction with a random utility model to estimate welfare for stream quality improvements near Pittsburgh. They found that households were willing to pay between $44 and $122 per annum for a variety of stream improvements that varied according to baseline and post-recovery conditions, and that the multiattribute context permitted the joint valuation of two substitute goods (environmental improvements on two streams). CVM studies use the stated preferences of survey respondents to estimate measures of consumer surplus. They can be applied creatively and used to value public goods that are not traded in the marketplace. CVM surveys are not without their difficulties however and must be applied using guidelines (Hausman 1993, Arrow et al. 1993). While the valuation results are context-specific and there are challenges in applying the values derived in one situation to another (a practice known as ‘benefits transfer’), stated preference methodologies offer the only real hope for valuing nonuse values. Potential impacts of externalities on recreational fisheries Externalities involving recreational fishing species are common and will distort the true value of recreational fishing in society. [In economics, externalities are defined as considerations lying outside the model, unforeseen events and the like – eds.] These can arise when upland activities harm recreational fisheries (e.g. siltation from logging decreases the survival of salmon eggs in Pacific Northwest streams), commercial fishing reduces available stocks of recreational fish, or when market prices are distorted due to subsidies or other government policies (e.g. subsidising agricultural fertilisers results in excessive nutrient runoff and eutrophication of lakes used for recreational fisheries). Consider the case of recreational billfish angling in Costa Rica. Fishers are concerned about the effects of domestic longlining, a commercial fishery with revenues under US$1m, on billfish stock abundance (Ditton and Grimes 1995). Over 80% of visiting anglers surveyed indicated that they would go to other countries if billfish stocks declined due to over-fishing. The loss of surplus in the Costa Rican tourism industry might only partially be compensated for by relatively minor gains in producer surplus in the commercial longlining sector. In economic terms, the commercial longlining fishery may impose external costs on the recreational fishery, making it more expensive to 03phch3.indd 43 10/15/01, 4:48 PM 44 M.A. Rudd, H. Folmer and G.C. van Kooten find depleted fish stocks and/or reducing market demand for the Costa Rican fishing experience by making it less attractive for anglers, compared to countries with healthier stocks. The effect of externality can be illustrated with the aid of Fig.·3.2. Let Scom1 in Fig·3.2(a) represent the private marginal cost (supply) of fishing by the commercial sector if long-run sustainability of the stock is ignored (or discounted at a higher than socially optimal rate). Then Scom0 represents the true costs to society. Assume a constant world price, pcom*, for Costa Rican billfish because the small production has no impact on overall world prices. By externalising the effects of commercial fishing on stock sustainability, producers gain area [qcom1·–·qcom0]·×·pcom* in revenue, but only area abcd in producer surplus. Thus, the economic benefit to the commercial longline fishery depends on the shape of the supply curve and will always be less that the increase in revenue so long as the marginal cost of catching more fish is positive. Because the commercial fishery operates at Scom1 rather than Scom0, there are increased costs in the sport charter industry (e.g. charter boats must spend more time and fuel to land the same amount of fish as stocks decline). The supply curve in the sport-fishing sector shifts inwards from Srec0 in Fig.·3.2b to Srec1. The decline in billfish stocks would also cause a drop in demand for Costa Rican recreational fishing, from Drec0 to Drec1, as anglers seek out alternative destinations where stocks are more abundant and the fishing experience more rewarding. Expenditures in the sport-fishing sector would fall from [prec0·×·qrec0] to [prec1·×·qrec1]. Note that the effect of the changes in supply and demand indicate an unambiguous decline in the anglerdays of sport fishing, but the effect on the price of a billfish charter trip (prec1) is ambiguous, depending on the shape and extent of the shifts in the supply and demand curves. The combined shifts leave area rsv as consumer surplus and rvy as producer surplus. The net decrease in overall social welfare is given by area [stwx·+·yuwz·–·uvxw]·=·[stwx·+·yvxz], which is different from the decline in revenue. Loss in social well-being may be greater or less than the decline in revenue, depending upon the nature of supply and demand in the recreational sector. From an economic perspective, there could be an overall gain in aggregate social welfare if the commercial fishing industry bore the full costs of billfish stock depletion (operated along Scom0 rather than Scom1 in Fig.·3.2a), with any resulting increase in billfish abundance more than compensated for by the increased well-being of recreational fishers and suppliers. If curtailing stock depletion was prohibitively expensive, however, and welfare in the recreational sector was only marginally enhanced by increased abundance of billfish, it could be socially optimal to increase stock depletion. The optimal level of fishing and the allocation between recreational and commercial fishing interests is a question that would require detailed empirical analysis. Costs, benefits and incentives It is also useful to examine changes in the well-being of various interest groups to develop an understanding of industry and interest group (actor) incentives, how particular policy proposals differentially affect actors, and how policy implementation outcomes might be affected. In Costa Rica, national longliners would be adversely affected by policy initiatives that increased billfish conservation if they already made substantial profits under the status quo. The threat of losing producer surplus could lead to lobbying if this group could mobilise 03phch3.indd 44 10/15/01, 4:48 PM Economic Methods 45 (a) Scom0 Price Scom1 c pcom * b a 0 d qcom 0 qcom 1 Quantity (b) t Price Srec 1 s Srec 0 u prec 1 r prec 0 v w x y z Drec0 Drec1 0 qrec 1 qrec 0 Quantity Fig. 3.2 Changes in (a) producer surplus in the commercial billfish longline fishery and (b) producer and consumer surplus in the billfish sport fishery in the face of overfishing in the commercial sector. Commercial fishing expands from qcom0, to qcom1 when supply expands to Scom1 due to an externality. Sport fishery supply (Srec) and demand (Dre) contracts to qrec1. The net change in social welfare is given by abcd (the gain to commercial sector) less (stwx·+·yvxz) (the loss to the sport fishery sector). politically, and there could be adverse implications for local politicians as a result. However, if there was no surplus in the industry now (boats just covered variable costs) and an increase in billfish conservation would only result in greater capitalisation and a race to capture the extra fish, there may be few incentives for fishers to organise and oppose conservation policies. Understanding economic well-being can shed light on political activities and the chances for successful policy implementation. Likewise, observing the political influence of different actors can provide strong hints at the magnitude of the surpluses those actors might enjoy (e.g. consider the political power and organisation of farmers in countries that have marketing boards or agricultural subsidisation). Questions arise about the distributions of expenditures and economic benefits when dealing with recreational fisheries. While the ‘winners’ from conservation (the sport sector) in the hypothetical Costa Rican example may gain more than the ‘losers’ (the longliners) lose, there is no assurance that compensation will be made or that any benefits from the sport fishing 03phch3.indd 45 10/15/01, 4:48 PM 46 M.A. Rudd, H. Folmer and G.C. van Kooten sector will flow to commercial fishers. The amount of surplus that is actually captured by Costa Rican interests in the government and the tourist industry may not be high, especially if foreigners own many of the charter boats. Politically, it may be hard to justify domestic policies where the beneficiaries of increases in overall welfare are nonresidents and the costs are borne by local citizens. Ditton and Grimes (1995) estimated a local multiplier effect of 2.0 for Costa Rica (i.e. every dollar spent by sport fishers generated two dollars of local economic activity), but Ditton and Clark (1994) estimated the billfish recreational fishery multiplier at only 1.07 in Puerto Rico. This suggests that almost all revenue that came into Puerto Rico as a result of billfish sport fishing expenditures leaked out of the economy due to Puerto Rican dependence on foreign imports [see also Kearney 2002 in relation to Australia – eds]. In general, only a small portion of tourism revenues remains in developing countries (Gössling 1999) and, as a result, policy analysts must pay careful attention to the regional welfare effects of policy alternatives on national actors, especially in developing countries and rural coastal areas. This is an area of research where estimates derived by economic analysis may be fruitfully employed in input–output analyses of regional economic impacts (see Hamel et al. 2000 for an example of work proceeding in this direction). Again it is important to note that economic activity is not the same as economic benefits, or surpluses. Only if the shadow price of labour and capital are zero – there is significant unemployment, a common situation in rural areas in many developing countries – can input–output analysis be used to address benefits (van Kooten 1993). Transaction costs and the provision of public goods In the past, government intervention was advocated in response to market failures arising from the over-exploitation of public goods, as was the case in the fishery sector. As it became evident that the ‘command and control’ approach had its limits, economists advocated a move to privatisation of some public goods in the face of ‘government failure’ and an increased reliance on economic incentives to alter human behaviour. Now there is evidence that, when dealing with the physical and cultural reality of many renewable resource systems, neither alternative – free markets or government regulation – is robust enough to alone ensure successful management of complex economic and ecological systems (Ostrom 1990), and that local resource users need to play an important role in the management of public goods. Ostrom’s empirical study of robust and durable renewable resource institutions led to the identification of eight ‘design principles’ that explained the success of institutions in sustaining a resource over time: were clearly defined boundaries for the resource and withdrawal rights • There There was congruence between appropriation/provision rules and local conditions • Collective arrangements existed, and in which local resource users participated • There werechoice effective of resource use who were accountable to resource users • There was a system ofmonitors graduated for cheaters • There were low-cost, local conflictsanctions resolution • There was recognition by government of rightsmechanisms of resource users to organise • Resource management activities that require regional co-ordination were nested in a hi• erarchical fashion 03phch3.indd 46 10/15/01, 4:48 PM Economic Methods 47 The transaction costs of producing public goods – protecting ecosystem services necessary for sustaining recreational fisheries – are often ignored in CBA even though the role of fisheries governance is to shape behaviour so that management is conducted at minimum cost (Hanna 1999). Transaction costs need to be considered if overall social welfare is to be maximised. These include the costs of developing initial contracts between parties responsible for the production of the ecosystem services necessary for recreational fisheries (e.g. agreements to zone areas that protect essential fish habitat), the costs of information needed to manage the resource, the costs of monitoring and surveillance of ‘cheaters’, and the costs of imposing penalties or sanctions. These costs are usually not explicitly taken into consideration as part of a supplier’s cost of production and are effectively externalised, with the costs most often borne by society as a whole via costly government management activities. Each management approach – the State, Market and Community – has transaction costs that will vary and depend on culture and social norms, property rights and institutional infrastructure, and the ecological nature of the fishery. The transaction costs of fisheries management can be prohibitive if done poorly and negate any surplus captured by producers and consumers For example, Schwindt et al. (2000) showed that the transaction costs of management exceed the total economic benefits of the fishery for the British Columbia commercial salmon fishery. It is now widely accepted that a top-down regulatory approach will be inefficient if the policies of the government do not conform to some degree to the norms of the local resource users (Costanza et al. 1998). Without reasonable congruence between rules and norms, there will be widespread abuse by resource users, and government monitoring and enforcement costs will escalate (Ostrom et al. 1993). Economic analysis can be used to quantify the transaction costs for different types of resource management policies and regimes. While most data available are for governmentmanaged commercial and recreational fisheries, there are modern examples of communitybased and privately managed recreational fisheries. Innovations in property rights for access to recreational fish and fishing grounds are currently being considered and it is likely there will be new forms of market-based management for recreational fisheries in the near future. Individual fishing quota for sport charter vessel operators in Alaska has, for instance, been proposed for the recreational halibut fishery. Under this plan, transferable quota could be exchanged between the commercial and recreational fisheries, allowing increased economic efficiency for the combined fishing sectors (Hamel et al. 2000). The North Pacific Fishery Management Council took a step in this direction in April 2001, voting to award individual catch shares to roughly 1100 halibut charter boats that operate each summer in South-east and South-central Alaska (Loy 2001). If approved, the individual quota plan could take effect in two or three years. Government management of recreational fisheries has encountered varying levels of success around the world. In Florida, for example, licensing of local and visiting anglers has generated substantial government revenue that has been reallocated specifically towards education, research and enforcement activities in the recreational fishery. Thus, there have been generally high levels of compliance with fishing regulations and a high level of public investment in scientific research. A suite of regulatory and management tools is used in Florida, including seasonal and gear restrictions, bag and size limits, seasonal closures, and marine reserves. Government-managed recreational fisheries should be expected to be most suc- 03phch3.indd 47 10/15/01, 4:48 PM 48 M.A. Rudd, H. Folmer and G.C. van Kooten cessful in minimising the transaction costs of management when target species are widely dispersed, requiring regional management (i.e. there is congruence between institutional and ecological scale), and where citizens have input into the policy planning and implementation process. Privately operated recreational fisheries, by contrast, are most likely to minimise transaction costs when the fishery is geographically concentrated and when private property rights can be effectively enforced using existing legal institutions. That is, unauthorised users can effectively be excluded from gaining benefits arising from the use of the recreational property. In this setting, long-term stewardship of the resource is economically sound because there are direct links between private investments in ecosystem quality and the benefits derived from selling access to the private fishing property. Leal (1996) outlines the Scottish example of salmon stream management, where privately held and transferable salmon fishing rights have existed since feudal times and are currently held in watersheds by individuals, fishing clubs, companies and nongovernmental organisations. District management boards, created by the property owners within a watershed, are responsible for monitoring, habitat improvement, restocking, and management of salmon stocks within the district. They can charge anglers for the right to fish on inland rivers and gain revenue from net fisheries at the river mouth. To accommodate growth in sport fishing demand, the Atlantic Salmon Conservation Trust (Scotland) Ltd purchased commercial fishing rights and let them go unused in order to increase the returns to anglers in the valuable inland salmon fishing streams. The transaction costs for community-based recreational fisheries management are likely lower when relatively local in scale (Ostrom’s second principle), but not easily privatised due to difficulties in excluding unauthorised resource users. Community management will result in lower monitoring costs when it is in the economic interests of community members, who are regularly on the water, to engage in monitoring and self-policing (Ostrom 1990). This tends to occur in situations when community members have a direct economic stake in the fish guiding industry and will be adversely affected by deterioration in stock abundance or habitat quality. Consider the case of the emerging bonefish (Albula vulpes, Albulidae) sport fishing industry in the Turks and Caicos Islands (TCI). The fish migrate around the Caicos Bank, a shallow area of about 3000·km2 that is also home to productive commercial queen conch and lobster fisheries. Privatisation of the fishery or fishing grounds is not possible because commercial fishers cannot be excluded from their traditional fishing grounds. Government managers have very limited information about bonefish stock size or population dynamics, and limited resources with which they could implement an effective bonefish management plan. Community management would thus seem to be a potentially viable option for the bonefish resource. While bonefish are only worth about US$2.20 per kilogram as food in the local market (M. Rudd, personal observation), there are a number of guiding operations catering to foreign fishers who place a much higher value on the fish, which are prized for their fighting ability. Visiting fly fishers typically pay between $350 and $500 per person per day for local guiding services, all of which operate under self-imposed catch-and-release norms. There are poachers on the Caicos Bank who place gillnets at the mouths of mangrove creeks to snare bonefish. The value of the bonefish resource to the sport industry has created economic incentives for resource protection – some fishing guides regularly cut away any illegal nets that they 03phch3.indd 48 10/15/01, 4:48 PM 49 Economic Methods now find (A. Danylchuk, Center for Marine Resource Studies, personal communication). The bonefish guides are actively participating in tag and release studies designed to improve scientific understanding of stock dynamics and the potential effects of marine protected areas on bonefish conservation. The charter companies, all of which are controlled by TCI ‘Belongers’, also offer alternative employment opportunities for former commercial fishers in outlying rural islands. While community-based management has not been officially implemented for the TCI bonefish sport fishery, conditions are favourable for bottom-up participation in the management of the local recreational fishery. A challenge for a community-based TCI sport fishery management agency would be to limit the size of the industry, as congestion could rapidly lead to a degradation of the fishing experience (and angler WTP) even if bonefish stocks remain healthy. Summing up the economic value of recreational fisheries for society The overall changes in societal well-being from any proposed policy that affects recreational fisheries can, in theory, be derived by summing the appropriately discounted costs and benefits. Many narrow CBA studies in the past have only considered extractive direct use values on the demand side and narrowly defined project costs on the supply side. While this may be appropriate in some sectors, recreational fisheries depend upon ecological services that are public goods. As such, they tend to be under-produced and require either government policy intervention or collective action at the local level to increase production to socially optimal levels. This causes three main complications that must be addressed in CBA: nonextractive and nonuse values should be accounted for in order to derive all consumer welfare benefits; market distortions that indirectly affect estimates of both producer and consumer surplus in recreational fisheries should be accounted for; and the transaction costs of alternative forms of supplying public goods should be considered. Recall from Fig.·3.1 that people are willing to pay some amount, CS, for an increase in a public good. This surplus needs to be included in CBA calculations. The costs of policy implementation need to be considered as well. Many economists consider this to be a straightforward calculation, but this may not the case for public goods and the analyst must consider the costs for alternative forms of provision. Many policies may achieve a desired result (i.e. there can be many sufficient conditions for the policy outcome), but the costs could vary greatly depending on the social, ecological and institutional context. Hybrid forms of governance (‘co-management’) are possible and likely desirable for many recreational fisheries. A particular challenge in recreational fishery policy analysis will be to evaluate the efficient ‘scope of government’ (e.g. Hart et al. 1997). That is, what combination of State, Market and Community organisations that can minimise the overall costs of producing and allocating quasipublic ecosystem services is necessary for the health of recreational fisheries? Conclusions Economic analysis can be a useful tool for evaluating recreational fisheries policies. It can be used to assess the changes in social welfare resulting from changes in government policy 03phch3.indd 49 10/15/01, 4:48 PM 50 M.A. Rudd, H. Folmer and G.C. van Kooten (or from changes in exogenous factors such as market prices or environmental change). In addition, economic analysis can be used effectively to identify key policy actors and provide valuable insights on incentives and the patterns of behaviour that are likely to result from specific policy changes. When properly conducted – accounting for market and nonmarket values of consumers, the costs of production of firms, and the transaction costs of management – economic analysis can provide important information that can help policy makers improve economic efficiency and the effective allocation of resources to investments that benefit society as a whole. When conducting economic analyses of recreational fisheries, it is important to consider the many nonmarket values that arise from nonconsumptive use of the fish resources and the ecosystems that sustain them. While nonconsumptive use value, indirect use value and nonuse values have been considered extensively in other fields of environmental valuation, recreational fisheries seem to be under-studied by comparison. On the supply-side, there is a dire shortage of research on the cost structure of suppliers. As a result of these shortcomings, the true economic benefits to society of recreational fisheries around the world have not been adequately assessed. Given the prominence of recreational fishing as a form of leisure in many parts of the world, there is need for more detailed economic analyses of economically and socially important recreational fisheries. Finally, it is important to consider transaction costs in the economic analysis, an item often neglected in cost–benefit analysis. The costs of maintaining and managing ecosystems needed for recreational fisheries varies greatly over situations that differ in terms of ecology, social context and institutions. 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