Frequently Asked Questions
What do you mean by the "economic value" or "benefit" of improving water quality in Iowa’s lakes?
The economic definition of the value of a good, say, a pair of shoes, is the amount of other goods and services individuals would be willing to do without if they absolutely had to in order to have the pair of shoes. So, if Laura has a pair of shoes that Jane wants and Jane is willing to give up other goods and services worth up to $300 for that pair of shoes then the value of that pair of shoes to Jane is $300. It is convenient to measure this in dollars rather than in quantities of the exact goods and services as this makes comparisons much simpler. For this reason, economists often use the term "maximum willingness to pay" (or "MWTP" for short) to refer to this economic value. Of course, what a consumer actually has to pay can be quite different from their maximum willingness to pay. A consumer who can find the pair of shoes on sale for only $20 will enjoy a great deal -- he receives what economists refer to as a "surplus" (or "net-benefit") of $280.
The economic value of water quality improvements in Iowa lakes can be analogously defined as the maximum amount individuals are willing to pay to obtain those improvements. This maximum willingness-to-pay concept can appropriately be used by policymakers in deciding how to spend limited public monies. By identifying which public goods and services consumers most highly value, policymakers can identify which public projects are likely to improve the quality of life for their citizens the most, that is, which projects are the "best deals." For this reason, the economic value just described is the concept used by the federal government in doing cost-benefit analyses of government regulations.
While these values are difficult to measure, economists and limnologists at Iowa State University have undertaken a large research project to estimate these values for water quality improvements at over 130 lakes in the state.
How does economic value (MWTP) compare to the expenditures and jobs generated by economic activity?
In addition to the economic value of water quality improvements, local communities and regions are often interested in another measure of the economic impact of environmental improvements, namely, the impact that that those improvements bring to their local economy. Typically, this "expenditures impact" is measured in total dollars of spending generated locally by the environmental improvement and/or the number of local jobs these expenditures create. This type of information is particularly relevant for those interested in promoting and maintaining the viability of local communities and those interested in generating support from a local community for local investment in a good.
Income and employment associated with expanded visitation can be estimated using an input-output model for the region. An input-output model is essentially a general accounting system tracking expenditures and purchases among sectors in the local economy. Using the IMPLAN data and a modeling system, an I-O model is configured, allowing us to estimate the increased visitation and expenditures generated by a water quality project. The local economy is stimulated by the new visitors and retail purchases they make. The I-O model takes these estimates of new tourism spending, tracks them through the rest of the economy, and summarizes the secondary and overall purchases.
While the "expenditures impact" of a water quality project (or other environmental improvement) is not a measure of the value or benefit of that project to society as a whole, it measures activity of potentially great interest to local communities and stakeholders. Thus, while its appropriate use differs from that of "economic value" (MWTP), it is still a useful concept.
When should the expenditures impact be used to evaluate a project and when should the economic value (MWTP) be used?
Whether one wants to use the economic value (MWTP) of a water quality improvement or the expenditures impact or both depends on the policy question that is being asked. If the purpose of the evaluation is to determine whether the benefits from investing in a project are worth the costs, the appropriate measure to use is MWTP. The MWTP measures what people are willing to give up (if they had to) to obtain the project. If this value exceeds the costs of the project, then policymakers know that by undertaking the project, they have provided people with a valuable good -- the product they have provided is worth more than the cost. The MWTP measure is the standard measure used in cost-benefit analysis.
If the question of interest is whether a local community should support a water quality improvement project, then how much increased economic activity a town or region might experience as a result would be of interest. One can imagine that this measure might be particularly important to a town council or local citizens group considering whether to provide partial funding or other form of support to a water quality project.
How do changes in property values and local real estate taxes fit into this discussion?
In addition to the "expenditures impact," an environmental improvement project can affect the value of real estate in a local region and therefore alter the tax base and level of real estate taxes collected. Like the increased market activity that generates more revenue to local businesses and jobs to local inhabitants, increased tax revenues may be a strong incentive for a community to support an environmental project. However, like the "expenditures impact" of a project, these tax revenues do not measure the value of the project from a societal prospective (that is, it would not be a component of benefits in a cost-benefit analysis).
There is, however, a component of these changes in real estate values that does measure part of the economic value of the project: the increase in the property value itself. If the project makes a lake or region more desirable to live in, then people will be willing to pay more for homes in the area than they would be in lieu of the project. This increased demand bids up the prices of homes in the area. This increased price is basically reflective of the value of the project, rather than the innate value of the home (the same house sold for less before the project was built than afterwards, so the difference in price can be attributed to the value of the project).
What are ecosystem services? Can they be valued using the economic value (MWTP) concept?
The term "ecosystem services" is used to describe a wide variety of services that ecosystems and the environment as a whole provide to people. These services range from the provision of flood control to water cleaning capability to provision of habitats for hunting opportunities, and many more. Different sets of services are associated with different ecosystems; thus, a tidal wetland may provide a very different set of services than a prairie remnant in the Northern Plains. While the concept of MWTP as a way to value ecosystem services is equally valid as for any other good or service, in practice these services are challenging to value since it can be difficult to describe their full range of attributes and products.