Economic Values

2. Intrinsic Value of River Preservation

3. Intrinsic Value of Traditional Lifestyle

Financial values only represent part of the value of income-generating activity in the BNR watershed. In this chapter, we explore the economic values beyond those which are measurable in monetary transactions. Such an analysis more accurately reflects the complete economic picture of the BNR watershed. We will compare agribusiness to recreational economic values here, analogous to the financial comparison in chapter 2.

Non-Financial Recreational Value

The primary economic benefit of recreational activity is that the participants enjoy it. That enjoyment represents an economic benefit as much as does cash income, which is why people are willing to pay for recreational enjoyment. We measure the economic benefit of recreational enjoyment by assigning an equivalent monetary value to it, based on how much people are willing to pay which they do not actually have to pay. We determine that amount by measuring the travel costs that people spend getting to the BNR, and using those costs to derive a "demand curve," from which we derive a total willingness to pay. This method is called the "Travel Cost Method," and is described in detail in Appendix F, including our complete derivation of the non-financial benefit of recreational activity.

Finding 3.1: The non-financial recreational value of the BNR is $38M.

Recreational users of the Buffalo National River receive an economic benefit of
$37.6 million, beyond the financial benefits of direct recreational spending.

Intrinsic Value of River Preservation

People value the Buffalo National River beyond its recreational value. The river has an "intrinsic value" because many people value its preservation for its own sake, even if they never use it recreationally. Unique natural resources such as the BNR often have intrinsic value to people who would never consider even visiting. We attempt to measure that value here. As with recreational value, we look at people's willingness to pay for the BNR as an indication of their economic valuation. In this case, we look at membership in environmental groups within the visitation region of the BNR (we used parts of a five-state area). The theoretical basis of this method is that all members of environmental groups in the region would be willing to devote their entire membership dues to the preservation of the BNR. Hence, the membership dues of environmental groups in the region measure the intrinsic value of the BNR. Details of our methodology and derivation of our value appear in Appendix G.

Finding 3.2: The intrinsic value of the BNR is over $6 million.

Environmentally concerned people would be willing to pay at least $6 million for the preservation of the Buffalo River, beyond its recreational and commercial value.

Intrinsic Value of Traditional Lifestyle

Just as some people value preserving the Buffalo River for its own sake, others value preserving the traditional lifestyle of the Buffalo River region. Beyond the financial value of agribusiness, people may value ranching, logging, and farming as a family tradition, or as a way of life worthy of being preserved. Once again, we attempt to measure that value by looking at people's willingness to pay to support the lifestyle, beyond the financial payments which are made as a business transaction.

Our method here involves real estate prices. The price of an acre of land should be equal to the "net present value" that the land can produce in income. Financial investors (such as farmers considering buying a parcel of land) could buy land, or they could put the same amount of money into the bank. The amount of profit that can be earned from the land should be the same as the amount of interest that can be earned in the bank (that's known in economics as the "opportunity cost of money"). The "net present value" of ongoing income from land is translatable into a price for land by dividing by the opportunity cost of money. If the price of the land is higher than the net present value of the profits which it generates, it means that people are valuing the land at greater than its financial value. We ascribe that difference to an intrinsic value of the traditional lifestyle which accompanies agribusiness activity on the land.

We looked first at livestock and farming real estate prices. The market price for cleared land is about $1,500 to $2,000 per acre, based on a survey of real estate offerings around the BNR watershed. The amount of profit which can be derived from farming and livestock is about $75 per acre, as noted in Table 2.2 and detailed in Appendix B.1.3. That represents an annual profit on the land investment of 5% down to 3.75% depending on the per-acre price. The going rate for money market accounts is about 4% (lower for shorter term, higher for longer term). That means that people are treating land purchases the same as they would treat a financial investment -- there is no willingness to pay beyond the financial value of the land. Therefore we conclude that the intrinsic value that people place on the ranching and farming lifestyle is zero.

With forested acreage, we similarly found no value above the financial value. For wooded acreage, the market price ranges from $300 to $400 per acre (from our same survey of BNR watershed realtors). Forest acreage yields a profit of about $5.21 per acre, as noted in Table 2.2 and detailed in Appendix B.1.6. That represents an annual profit on the land investment of 1.7% down to 1.25% depending on the per-acre price. People are willing to pay more for forest acreage than its finances would indicate -- assuming a 4% profit, the price should be $130 per acre. Much of this difference comes from government activity in the timber market, which holds down the price of timber land. To calculate the economic price, we subtract out that difference, known as a "distortion," because the government activity distorts people's willingness to pay. It is beyond the scope of this study to estimate the true distortion value, so we use a rough estimate. Assuming that the Arkansas-wide net income per acre ($36.36) were applied to the privately owned portion of the watershed, the average income per acre would rise to $27.76, which implies a financial price of $694 per acre. Even though our estimate of the distortion is very rough, it is so much above the actual price of land that we assume that the actual land price accurately reflects the expected financial yield.

Finding 3.3: Intrinsic value of the region's traditional lifestyle

People are not willing to pay to support a traditional lifestyle of farming and logging, beyond their financial willingness to pay.

We fully expected to find a substantial value of the traditional lifestyle by this method. While all of our figures in this section are rough estimates, we feel that the result is correct because the error in estimation is exceeded by the fluctuations in bank interest rates and the variations in land prices. A better estimate would require a survey of a few years of land prices compared with interest rates, and a better assessment of timber market distortions. We state in conclusion that our estimation of a zero intrinsic value for the traditional lifestyle in the watershed does not imply that people do not value that lifestyle -- only that they are not willing to pay any more for it than is financially justified.

Economic Comparison

We summarize our net financial findings and our economic findings in Table 2.3. In contrast to the conclusions from the financial comparison, the economic comparison indicates that the benefits of recreational use of the BNR watershed are roughly equal to the benefits of agribusiness use of the watershed. (The table indicates a higher value for recreational use, but the difference is likely within the margin of errors of all of the estimated values. We therefore would describe the economic benefits as "equal"). This is in contrast to the financial analysis, in which the agribusiness benefits were ten times the recreational benefit.

Economic Comparison                                      Table  2.3     

3-County      3-Co. Net         

Net Income       per acre         

        Farming - net financial          $31,815,000         $73.80          

        Forestry - net financial          $4,479,000          $5.21          

        Agribusiness financial           $36,294,000    avg. $28.13          

        Farming - intrinsic value                 $0          $0.00          

        Forestry - intrinsic                      $0          $0.00          
        value                                                                

        Agribusiness economic             $36,294,000        $28.13          
        total                                                                



        Tourism - net financial           $3,871,600         $11.26          

        Recreation -                     $37,594,807        $109.37          
        non-financial                                                        

        BNR intrinsic value               $5,986,030         $17.41          

        Recreational use economic        $47,452,437        $138.05          
        total

The primary distinction between the two analyses is in who receives the benefits. In the case of the financial analysis, all of the benefits accrue to people who live in the watershed. In the case of the economic analysis, the benefits accrue to all the people who use the BNR or who value the BNR, even though they live elsewhere. In fact, the basis of our analysis of non-financial recreational values and of intrinsic value requires that we look at benefits to people from outside the region.

In terms of economic reality, more benefits accruing to people from outside the region means that richer people are the beneficiaries of the economic gains, compared to the poorer people who are the beneficiaries of the financial gains. That is, some weight should be put on distributional effects, since the relatively poor residents of the BNR should receive more benefit than the relatively rich visitors.

In terms of political reality, beneficiaries outside the watershed do not vote for the representatives in the watershed. The constituency of the state representatives of the BNR watershed is concerned with their financial benefits more than they are concerned with the overall economic benefit which accrues to outsiders. Therefore, political representatives can be expected to justifiably focus on the financial comparison more than the economic comparison.