Thursday, November 22, 2012

The welfare impacts of an invasive species: Endogenous vs. exogenous price models

Abstract: The “fixed-prices” models used to measure damages from invasive species typically overestimate financial impacts. These fixed-price assessments do not address key behavioral modifications that lower costs as people adapt by changing their mix of inputs and outputs given new economic circumstances. Using the invasive emerald ash borer (Agrilus planipennis) in Ohio as a motivating example, we develop a computable general equilibrium model that accounts for these behavioral responses. We estimate annual damages from the beetle to be about $70 million, an order of magnitude less than the $400–$900 million in damages estimated using a fixed-price model. Damages are lower because people adapt through price and income adjustments that occur after ash trees are devastated from the emerald ash borer.

► We measure invasive species damages using endogenous price and fixed-price models.
► Income, output and substitution effects are not addressed in fixed price models.
► A computable general equilibrium model calculates emerald ash borer damages.
► Our endogenous price estimates are half of the losses from fixed-price models.
► Endogenous prices allow for behavioral responses to changing market conditions.

Keywords: Endogenous prices; Fixed prices; Invasive species damages; Computable general equilibrium; Emerald ash borer

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Fig. 1. Replacement cost estimation of ash tree esthetic value: over the lifetime of existing ash trees, the esthetic service they provide is “free” and corresponds to the cost curve, MC1 that lies along the x-axis, in which individuals demand quantity Q1. The cost to remove and replace all ash trees in the event of ash death due to EAB corresponds to cost curve MC2. The replacement cost approach would calculate the area under the MC2 curve, acQ1, as the benefit of removing/replacing ash trees esthetic value. However, this overestimates the esthetic value provided by the new trees. The true willingness to pay for this service is really the area under the demand curve for esthetic value or area bdQ1 (Barbier, 2007). There is no direct connection between replacement costs and a useful welfare measure.
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  • Fig. 2. Graphical depiction of the CGE model: arrow 1 represents the vertically integrated impacts from a loss of ash beginning with the logging sector. Arrow 2 represents the cost impact to parks and recreation sectors. Arrow 3 portrays the removal fee and consequent increase in demand of the garden sector. Arrow 4 represents the state governments' replacement fee and increase in demand for the garden sector. 
by Shana M. McDermott,David C. Finnoff and Jason F. Shogren all of the University of Wyoming, Department of Economics and Finance, Laramie, WY 82070, United States 
Ecological Economics via Elsevier Science Direct www.ScienceDirect.com 
Volume 85, January, 2013; Pages 43–49

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