The Value of Riparian
An Economic Framework for Policy-making
Prepared
for
Economics and the
National Oceanic and Atmospheric Administration

James F. Casey
Department of Economics
540 458 8102
Outline
1.0
Introduction
3.4
Market Failure: Externalities and Public Goods
4.0 Non-market
Valuation
4.1 Revealed Preference Techniques
4.2 Stated Preference Techniques
6.0 The Costs
of Riparian Restoration
7.0 Public Policy
8.0 Conclusion
9.0 References
10.0 More Sources for
information
The Economic Value of
RFB in the
1.0 Introduction
The
Figure
1. The

The
Bay has two of the five major
In the past 100 years the Bay has faced numerous
challenges and has always managed to come out on top, but today it faces new
challenges. Many of these are not
visible to the naked eye and many originate hundreds, sometimes thousands, of miles
away from the Bay itself. Increased
population and development within the watershed and increasing demands for its
multiple goods and services present great challenges for preserving and
restoring this treasure.
The top three stressors
on the Bay’s systems
are (1) excess nutrients, (2) toxic chemicals
and (3) air pollution changes. One of
the most severe factors affecting water quality is nutrient pollution. This comes in the form of elevated levels
of nitrogen (N), and phosphorus (P). Livestock
waste and fertilizer runoff from cities, suburbs, and agricultural land
throughout the entire watershed contribute to nutrient pollution. Nutrient delivery to the Bay has been
identified as one of the primary factors and has been the primary focus of
research and policy efforts related to achieving water quality improvements [9].
The health of the Bay, its streams and rivers, is
intricately linked to trees. Forests
serve as the living filters of pollutants.
They absorb excess nutrients that would otherwise end up in the rivers
and streams throughout the watershed and eventually in the
One potential response to the nutrification problem
is the creation and restoration of riparian forest buffers (RFB). The ecological benefits of riparian forest
buffers are relatively well known, but the economic benefits and costs are not
as well understood. Numerous studies,
mostly in
2.0 Forests and the Watershed
Today, forests cover approximately 60% of the land
in the Bay watershed approximately 24 million acres [15]. At the time of the early colonies the
watershed was over 90% forested. This
forest cover reached a low of about 40% in the post civil war era, and today
new development of land for houses, retail and commercial structures are the
primary culprits for conversion and loss of forest cover. It is estimated that by 2020, another 600,000
acres or forestland will be converted to other uses [15].
One of the keys to the health of the Bay is how we
develop land in the future. The
Chesapeake Bay Riparian Forest Buffer Initiative has been in operation since
1996 and 476 miles of riparian forest have been replanted.
2.1 The important function of riparian forests
Riparian forest buffers are areas of forested land
adjacent to a stream, river, marsh, or shoreline which form the transition
between land and water environments. Although riparian areas comprise only
about 5 to 10 percent of the land in the watershed, they play an important role
in maintaining the health of the Bay. Since the 1970s, more than 400
papers have been published looking at various aspects of the nutrient-forest
buffer-water interface [7]. The physical
and chemical processes
of the forest buffer are discussed in this literature. Although there are numerous kinds of buffers,
forests are the most effective type of
riparian buffer available.
Figure
2. Forested Buffer in an Agricultural Landscape

Riparian
forest buffers improve water quality while providing habitat for wildlife and
fish. They are one of the keys to
controlling non-point source pollution. They also help maintain the integrity
of stream channels and shorelines, reduce the impact of upland sources of
pollution by trapping, filtering, and converting sediments, nutrients and other
chemicals, supply food, cover and thermal protection to fish and other
wildlife.
The
type, size and effectiveness of riparian buffers varies based on the location,
environmental management needs and landowner needs. Environmental managers and
landowners often use the three-zone riparian forest buffer to plan and design
riparian forest buffers [12]. The width of each zone is determined by specific
site conditions and landowner objectives.
Figure
3.

The
ability of RFB to function naturally is crucial to the protection of water
resources in the
Figure
4. Information Kiosk: Woods Creek,

Groundwater
data from the Neuse River basin in North Carolina show more nitrate is removed
in a 30-foot buffer than in a 15-foot buffer and each is better than no buffer
at all [14]. Forested riparian buffers
in the
The objective of this
section of the paper is to provide enough of an understanding of fundamental
concepts in microeconomics so they may be used
in analyzing the benefits and costs of riparian forest buffer
preservation and restoration. Economists
approach almost everything in the world from two sides: the benefit side and
the cost side. Each and every decision
that is made has costs and benefits and the appropriate choice, whether it be
improving water quality in the
“One of the cornerstones of
economics is understanding consumer preferences” [6] p.289).
The value side of our
analysis is based on the fundamental notion that individuals have preferences
for goods and services and given the choice, they will express those
preferences for particular goods and services.
The value of the goods and services bundle is the amount the consumer is
willing and able to sacrifice in order to obtain it. In other words, what is the consumer willing
to pay? For example, I may be willing to
pay five dollars to obtain a latte from Starbucks while another consumer is not
willing to pay this much. We could then
say that I place a higher value on the latte than does the other consumer in
this example. Clearly, I have a higher willingness
to pay (WTP). The concept of willingness
to pay is not limited to physical goods.
I may be willing to pay for unobstructed sunsets, or thriving fish
populations in the Bay. Later, we will
see how this concept of willingness to pay can be applied to policy decisions
concerning the socially optimal amount of riparian forests in the watershed.
There is another way
of looking at willingness to pay, which is more familiarly known as
demand. The law of demand states that
other things being equal the higher the price of a good, the lower the quantity
demanded. Closely related to the
quantity demanded, yet slightly different is the concept of demand. The term demand refers to the entire
relationship between quantity demanded and the price. Referring to figure 5 it is actually quite
simple to see the difference between quantity demanded and demand with an
example using a common commodity, one that you may even be consuming as you
read this, coffee. When the price of coffee rises, from P1 to
P2, the quantity demanded falls from C1 to C2.
This is seen as a movement along the demand curve. But what happens if the price of cream and
sugar rises? Since many of us consume
these complementary goods with our morning coffee, we may in fact decide to
drink less coffee. Notice, nothing has
happened to the price of coffee, but the demand
for coffee has fallen. This is
represented by a shift in the entire demand curve and results in the purchase
of less coffee at all prices than was the case before the increase in the price
of cream and sugar.
The demand curve
shows the willingness to pay for each additional unit of coffee, also known as
the marginal willingness to pay. This expresses
the marginal benefit associated with purchasing one more unit or another cup of
coffee, as it may be. The total
willingness to pay is the amount the consumer is willing to pay for the entire
purchase rather than going without the good (coffee) and is represented by the
entire area under the demand curve.
Figure
5. Demand Curve

Now, let’s turn our
attention to the cost side of decision-making.
The best things in life are free!
Is this statement true? To an
economist, it is most certainly false.
Everything has a cost. If I want
to sit on the beach and watch the sunrise, then I can’t sleep. Watching the sunrise from six to seven in the
morning has cost me an hour of
sleep. I did not have to pay to watch
the sunrise, but it still cost me something.
I had to make a tradeoff and this tradeoff exhibits the concept of
opportunity cost. In addition to the opportunity cost, most production
decisions also have direct costs. That
is, the raw material and labor inputs that go into actually making
something. In order to make the concepts
of costs and supply less abstract, let’s return to our coffee example.
By definition, the
quantity supplied is the amount that producers are willing to sell in a given
period of time at a given price based on their costs of production. Again, the easiest way to depict this
relationship is with the use of a simple graph.
Figure
6. Supply Curve
C2 C1

The law of supply
states that other things being equal, the higher the price of a good, the
greater will be the quantity supplied.
As with demand and quantity demanded, there is a subtle yet important
difference between supply and quantity supplied. If the price of coffee rises, from P1 to P2,
the quantity supplied will increase, from C1 to C2. This is seen as a movement along the supply
curve in figure 6. But what happens if there are an unusually large number of
tropical storms in a given year and coffee plantations around the world are
damaged reducing the amount of the primary input, coffee beans? This would have the expected result of reducing
the supply of coffee, notice, not the quantity supplied, but the supply. This is depicted as a shift of the entire
supply curve and leads the higher prices for any given level of output. Again, this subtle, yet extremely important
difference is critical to understanding the costs, benefits, and amount of
riparian forest buffers found in the watershed.
3.3 Economic Efficiency and Markets
In the
previous section we introduced two concepts.
The concept of demand, which relates the quantity of output and the
consumer’s willingness to pay. And the
concept of supply, which relates the quantity of output and the cost of
production. Neither of these, by
themselves, is very useful in determining, for example, how much coffee should
be produced. In order to determine how
much coffee should be produced we need to bring the two together.
When consumers are free to choose the goods and services
they want to purchase and producers are free to produce the goods and services
they want to sell we see a situation develop where the marginal benefit of
consuming one more unit is exactly equal to the marginal cost of producing one
more unit and we have an equilibrium.
This equilibrium occurs at a price of (
D S

Economists will sometimes refer to this phenomenon as
the invisible hand of the market.
Although the invisible hand works for many goods and services, it does
not work for all. Environmental
economists are concerned about the failure of the market system, especially as
it relates to natural and environmental resources.
Despite the virtues
of the market system and the regulating effects of prices, the system does not
always work nor is it especially desirable to rely on it for many production
and consumption decisions. Sometimes
markets can not accurately measure the costs and benefits of private
decisions. When this occurs we have a
market failure and this is especially important for environmental goods and
services. A market failure occurs when
there is a divergence between private costs and social costs and/or the private
benefits and social benefits. This is also known as a negative
externality. A negative externality
occurs when during the consumption and production of the particular product or
service someone outside of the market transaction is negatively impacted. Another market failure that is important for
our discussion is the concept of a public good.
A public good is defined by the inability of the producer to capture all
of the benefits.
To think more clearly
about market failure, it is simplest and most beneficial for us to use the
example of a farmer in the watershed deciding how much land to clear for crops
and how much to leave as riparian forest.
In order to do this
we will start with another useful tool from the economist’s toolkit: the
production possibility frontier (PPF).
The PPF allows us to depict, graphically, all production possibilities,
given limited resources, between two goods.
For example, the PPF, in figure 8, shows that at point A the farmer is
planting 90 acres and keeping 10 forested and at point B keeps 50 acres
forested and plants 50zero acres. The
PPF allows us to see all the possible combinations. The farmer may decide to plant 100 acres and
leave 0 acres of forest, or 80 and 20, or 70 and 30. The question remains, how will the farmer
decide how much to plant and how much to keep forested? This is where the concepts of marginal costs
and marginal benefits come into play.
Figure 8. Production Possibility Frontier
50 crops

The
farmer will decide how much to plant based on the private costs and private
benefits he derives from planting. For
example, based on his private costs and benefits, the farmer will choose point
A (90 crops, 10 RFB) in order to maximize the net benefits by equating his MB
and MC (see figure 9). But, are all the
costs and benefits of this decision borne by the farmer?
Clearly the farmer can sell his crops in well-established markets
allowing him to capture the benefits, but are all the costs of his decision
borne by the farmer? What if the farmer
applies fertilizers and pesticides to his crops and some of these chemicals run
off the land and into the creek that runs through his property? What if the farmer clears his land next to
the creek and this destabilizes the creek bank allowing sediment to flow into
the water? What if the water temperature
rises because it is no longer protected by the shade of the trees? Does the farmer bear all of these costs? Surely someone downstream bears some of these
costs. Water quality is diminished. Fish habitat decreased. Therefore, those who drink the water and eat
the fish downstream will bear some of the costs generated by the farmer’s
decision.
Figure 9. Private Costs vs. Social
Costs
cropland

In figure 9, above, point A corresponds to the same
point A in figure 8. The farmer decides
to plant 90 acres of crops and accordingly there are only 10 acres left as riparian
forest. However, if all the costs
associated with this decision (including all the nonmarket negative
externalities) were considered by the farmer, then he would only plant 50
acres. In figure 9, this difference
between the marginal private cost and the marginal social cost is reflected by
the two supply curves. Point B is
socially optimal, but the farmer chooses point A. This covers the divergence between MSC and
MPC (negative externalities), but what about the benefits associated with
forested riparian buffers?
Figure
10. Private Benefits vs. Social Benefits
RFB Acres 10 50 P MPB MSB

Here we have a situation where the
marginal social benefit of an additional acre of forest is greater than the marginal
private benefit to the farmer. The
farmer can not capture any of the rents associated with the provision of these benefits/ecological
services, because there is no market for the provision of RFB services other
than the potential sale of the timber. Again,
most of the benefits are public goods. Therefore,
the socially optimal amount of RFB does not occur at point A, but rather at
point B. Using figures 9 and 10 it is
easy to see how the farmer ends up at point A on the PPF and how it is socially
optimal to be at point B.
Many natural and
environmental resources, including riparian forests, are not allocated
efficiently because of the inability of the market system to capture all the
costs and benefits, i.e. there is a market failure. According to
4.0 Nonmarket Valuation
Non-market valuation methods center upon two constructs:
willingness to pay and willingness to accept compensation. Willingness to pay, or WTP, is defined as
“paying a lower price or receiving a higher quantity or quality of resource, or
avoiding a higher price or lower quantity or quality of the resource” [11] p.306). Willingness to accept compensation, or WTA,
is defined as “forgoing a lower price or higher quantity or quality of the
resource, or tolerating a higher price or lower quantity or quality of the
resource” [11] p.306). The main
difference between these two methods of valuation is the presence of property
rights. If an individual has property
rights that guarantee him or her the right of clean water, WTA is used, while
if the property rights do not guarantee him or her that right, WTP is
used. Individuals have widely different
WTP and WTA values for use of environmental resources, due largely to varying
tastes and preferences for these resources [11].
For our purposes, it is useful to think of the farmer as
possibly being willing to accept compensation to forgo using the riparian zone
and of everyone else as having a willingness to pay in order to receive the
benefits from forested riparian buffers.
In order to determine this WTA and WTP we need to use nonmarket
valuation techniques. There are two basic
approaches for measuring the demand for nonmarket goods and services: revealed preference
(RP) and stated preference (SP).
4.1 Revealed Preference Techniques
In revealed preference, we observe a real choice in some
market and we infer information on the trade-off between money and an
environmental good [6]. The revealed
preference technique offers us two options: the travel cost method and the
hedonic method.
The travel cost method is the oldest of the nonmarket
valuation techniques and values natural and environmental resources by looking
at the actual travel expenditures people incur to visit a destination [3]. Based on the cost of travel, it is inferred
that the resource in question is worth at least as much as the expenditures to
the individual.
With the hedonic method, the goal is to see how the price
of a conventional good varies as the amount of a related environmental good
changes [6]. For example, if we look at
two identical houses, one with an unobstructed ocean view and another with an
oil platform in the viewscape, we can infer the value of an ocean view based on
the price difference between the two homes.[1]
4.2 Stated Preference Techniques
The stated preference techniques basically involve
asking people how much an environmental good is worth [6]. For example, I might ask someone in
The other option is called Conjoint Analysis or Choice
Modelling. Choice Modelling asks the
individual to choose from different states of the world with multiple
attributes. For example, the same
resident of
Figure 11. Riparian
Forest Buffer Woods Creek

5.0 The Benefits of Riparian
Having established the economic framework for analyzing the
costs and benefits of RFB, what are the costs and benefits? Let’s start with the ecological
benefits. Riparian forest buffers are
integral to the health of the
As we stated before, many of the benefits of riparian
forest buffers are nonmarket benefits.
If the farmer decides to keep an area forested rather than plant crops,
he can not charge the public for improving water quality, keeping the trout
happy, or stabilizing the bank. Table 1,
below, categorizes the benefits in terms of whether they are market, nonmarket,
or maybe a little of both.
Table 1. Categorization of benefits
|
Non-Market |
Market |
Both |
|
Filtration of sediment, nutrients, pollutants |
soil conservation/agricultural productivity |
recreation |
|
Maintain water quality |
|
aesthetics |
|
Maintain water temperature Habitat |
|
|
Although we have listed and described the ecological
services provided by RFB. And we have
categorized them into their appropriate market or nonmarket benefit
category. We have still not quantified
these benefits. Table 2, below,
summarizes the results of numerous nonmarket valuation studies.
Table
2. Benefit Estimates
|
Area |
Benefit |
Dollar
Value |
Source |
|
|
Safer drinking water |
$5.49 to $7.38 per month |
http://www.ext.vt.edu/pubs/forestry/420-153/420-153.html Jordan and Elnagheeb 1993. |
|
|
protect groundwater supplies |
$641 per household annually |
Sun and others 1992. |
|
|
improve water quality to a
"swimmable" level |
$275 to $366 per household per year |
Carson and Mitchell 1993. |
|
N.H |
groundwater protection plan |
$40 per household annually |
Schultz and Lindsay 1990. |
|
(crp) |
annual water quality benefits |
$3.5 to $4.5 billion, |
http://www.riparianbuffers.umd.edu/PDFs/FS774.pdf |
|
|
Complete restoration of riparian zone |
$89.50/ft |
Holmes et al. 2004. |
|
|
remove all nitrates from their water supplies |
$55 per month |
Crutchfield and others
1997. |
5.0 The Costs
of Riparian Restoration
Unlike the benefits, the costs of riparian restoration are more
straight-forward. There are three types
of costs to the landowner; (1) establishment, (2) maintenance, and (3)
opportunity. The establishment cost is a
one time cost which includes things like purchasing seedlings, prepping the
site, and the labor to plant the seedlings.
Maintenance costs are incurred annually and may include mowing, weeding
and other forest maintenance depending on the landowner’s objectives. The last cost is perhaps the greatest; the
opportunity cost. If the farmer decides
to restore the riparian zone, he must give up planting in the zone and forego
the income generated from harvesting those crops. Again, the landowners objectives will
influence these costs. For example, he
may stop planting corn and allow the riparian zone to “go wild.” Or, he may
decide to plant fast growing, merchantable hardwoods. Table 3, below, provides a summary of several
cost estimates from different areas of the
Table
3. Cost Estimates
|
Location/Costs |
Establishment
|
Maintenance
|
|
Source |
|
|
$70/acre |
$2/acre |
Piedmont: $53-172 Upper and middle coastal plain:
$70-630 |
http://www2.ncsu.edu/unity/lockers/users/g/gawossin /Conference.PDF |
|
|
$160/acre |
$8/acre |
No estimate |
VA Co-Ext. |
|
|
$0.98-$3.13/ft: establishment and maintenance |
|
No estimate |
Holmes et al. 2004 |
|
|
$378 per acre. |
$25/acre |
No Estimate |
http://aede.osu.edu/people/sohngen.1/bmp/lowtim.pdf |
|
|
$218–$729/acre: establishment and maintenance |
|
No estimate |
http://www.riparianbuffers.umd.edu/PDFs/FS774.pdf |
|
|
$575/acre: establishment and maintenance |
|
No estimate |
Lynch and Brown 2000 |
There is now the issue of moving from economic theory
to public policy. If the economic
framework suggests a divergence between social and private costs and benefits
and this is not socially optimal, then what types of policy are needed to
equate the marginal private and social costs and benefits? There are basically three policy options; (1)
taxes, (2) subsidies, and (3) direct production.
Commonly, public institutions such as local,
state, and federal governments use taxes to increase the marginal private costs
and move them closer to the marginal social costs. An example of this is taxing
pesticides. If the price of pesticides
increases, due to the tax, then the farmer will use less of it and less will
end up in the water.
When the issue is equating marginal
private benefits with marginal social benefits the public policy usually takes
the form of a subsidy. For example, if we want more riparian forests then we
need to pay farmers to increase the amount of forest. This is exactly what the conservation reserve
programs do throughout the watershed.
The third option is for public institutions to simply
restore riparian buffers on their own.
An example of this is happening in
Figure 12. Woods Creek Restoration
Project

8.0 Conclusion
The social science of economics provides us with an
invaluable set of tools for helping policy formation. The objective of this paper has been to
clearly set forth a framework for thinking about the socially optimal level of
riparian forest buffers in the Chesapeake Bay Watershed. Certainly there are other considerations that
need to enter the public policy debate, but the framework of costs and
benefits, markets and market failure, nonmarket valuation and economic value
can help us to think more clearly about the role of the public sector in
preserving and restoring riparian forest buffers in the Chesapeake Bay
Watershed.
9.0 References
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Websites
http://www.chesapeakebay.net/
http://www.chesapeakebay.net/pubs/subcommittee/nsc/forest/handbook.htm
http://www.fsa.usda.gov/pas/publications/facts/html/crepva00.htm
http://www.leopold.iastate.edu/
http://www.riparianbuffers.umd.edu/manual.html
http://www.unl.edu/nac/riparian.html
http://www.potomac.org/pwp/conference.html
http://www.riparianbuffers.umd.edu/
http://www.buffer.forestry.iastate.edu/
http://www.ext.vt.edu/pubs/forestry/420-154/420-154.html#L3
http://aede.osu.edu/people/sohngen.1/bmp/filter.htm#filter%20strip
[1] For an in-depth discussion of revealed preference methods see Kolstad chapters 15-17.
[2] For an in-depth discussion of contingent valuation see Kolstad chapters 15 and 18.
[3] For a detailed explanation of choice modelling see Casey 2004.
[4] The list of benefits and the explanations in this section of the paper are entirely from http://www.chesapeakebay.net/forestbuff.htm