chapter 17 economics of outdoor recreation

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Chapter 17

Economics of Outdoor Recreation

Outdoor recreation in many developed countries has grown rapidly in the latter part of the 20th century

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• Data for the U.S. on the number of people who participated in

different types of outdoor recreation• Large percent increases in number of participants were in bird

watching, hiking, backpacking, and sightseeing• Percent increases in number of participants in fishing and hunting

were small• To some extent this may reflect the impacts of the environmental

movement, which has tended to put greater emphasis on nonconsumptive uses of resources rather than the traditional consumptive uses

• Traditionally, much of the supply of outdoor recreation resources has been a public function

• In recent decades there has developed a privately provided market in outdoor recreation, from ski resorts to fishing and whale watching

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Table 17-1, p.334

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• Demand curves for an imaginary public park:

– Horizontal axis: visitor-days, defined as the total number of day-long visits (two half-day visits make one visitor-day); vertical axis: the entrance price to visit the park

– There are a series of aggregate demand curves, each pertaining to a different time period (10 years ago, the current period, and 10 years in the future), arrived at by summing the individual demand curves of visitors to the park

– q1, q2, and q3: numbers of visitor-days if entrance fees = 0

– Population growth, income growth, transportation improvements or drops in the price of gas, and taste and preference toward outdoor recreation shift D to the right

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1. The Demand for Outdoor Recreation Figure 17-1, p.335

Efficient Visitation Rates

• D is market demand curve for visits to a public park (MPB on slide 9 )

• D does not account for congestion externalities (MEB on slide 9)—when the rate of visitation increases, more visitors cause congestion that lowers the value of the visitation experience; if entrance fees are 0, there are open-access externalities—the users of the resource inflict on one another in the form of diminished resource value (q0: open-access level of visitation)

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Figure 17-2, p.337

Efficient Visitation Rates (con’t)

• Marginal costs of operating the park are constant at a level of MC (MSC on slide 9 )

• Curve A is MSB on slide 9• MSB = MPB + MEB; MEB is negative though!!!• In order to lead to the socially efficient use rate

q*, an extra fee = ‒MEB = congestion cost = C must be put into place

• Total fee = MC + C

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Consumption externalities Production externalities

(c)Positive

(d)Negative

(b) Positive

(a) Negative

The benefits to the rest of society of people being vaccinated before traveling abroad

Noise pollution from using car stereos

The benefits to the environment that arise from the planting of woodland by a forestry company

Wastes being dumped into a river by a company

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Modeling a Tax (on a negative consumption externality)

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$

Q

MPB

MSC

MSB = MPB + MEB0 QE QC

MPBt

b

a

Amount of tax

• Rationing: the controlled distribution of scarce

resources, goods, or services; rationing controls the size of the ration, one’s allotted portion of the resources being distributed on a particular day or at a particular time; in economics, rationing is an artificial restriction of demand

• Rationing by price: charge an entrance fee sufficiently high that visitation is limited to q*

• Nonprice rationing methods: limit entry to those people who meet some characteristics; first-come, first-served

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2. Rationing by Price

Greg Mankiw’s Microeconomics--CHAPTER 5 ELASTICITY AND ITS APPLICATION

P

Q

D

Q2

P2

P1

Q1

P rises by 10%

Q falls by 15%

15%

10%= 1.5

Price elasticity of demand

=Percentage change in Qd

Percentage change in P

Example:

Pricing and Total Revenue

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Along a D curve, P and Q move in opposite directions, which would make price elasticity negative.

We will drop the minus sign and report all price elasticities as positive numbers.

Along a D curve, P and Q move in opposite directions, which would make price elasticity negative.

We will drop the minus sign and report all price elasticities as positive numbers. Rule of thumb: The flatter the curve,

the bigger the elasticity. The steeper the curve, the smaller the elasticity.

D

“Inelastic demand”

P

QQ1

P1

Q2

P2

Q rises less than 10%

< 10%

10%< 1

Price elasticity

of demand

=% change in Q

% change in P=

P falls by 10%

Consumers’ price sensitivity:

D curve:

Elasticity:

relatively steep

relatively low

< 1

Greg Mankiw’s Microeconomics--CHAPTER 5 ELASTICITY AND ITS APPLICATION 12

D

“Unit elastic demand”

P

QQ1

P1

Q2

P2

Q rises by 10%

10%

10%= 1

Price elasticity

of demand

=% change in Q

% change in P=

P falls by 10%

Consumers’ price sensitivity:

Elasticity:

intermediate

1

D curve:intermediate slope

Greg Mankiw’s Microeconomics--CHAPTER 5 ELASTICITY AND ITS APPLICATION 13

D

“Elastic demand”

P

QQ1

P1

Q2

P2

Q rises more than 10%

> 10%

10%> 1

Price elasticity

of demand

=% change in Q

% change in P=

P falls by 10%

Consumers’ price sensitivity:

D curve:

Elasticity:

relatively flat

relatively high

> 1

Greg Mankiw’s Microeconomics--CHAPTER 5 ELASTICITY AND ITS APPLICATION 14

• If demand is elastic, then price elast. of demand > 1 % change in Q > % change in P

• The fall in revenue from lower Q is greater than the increase in revenue from higher P, so revenue falls.

Revenue = P x Q

Price elasticity of demand

=Percentage change in Q

Percentage change in P

Greg Mankiw’s Microeconomics--CHAPTER 5 ELASTICITY AND ITS APPLICATION 15

• If demand is inelastic, then price elast. of demand < 1 % change in Q < % change in P

• The fall in revenue from lower Q is smaller than the increase in revenue from higher P, so revenue rises.

Revenue = P x Q

Price elasticity of demand

=Percentage change in Q

Percentage change in P

Greg Mankiw’s Microeconomics--CHAPTER 5 ELASTICITY AND ITS APPLICATION 16

Differential Pricing• Many parks have capacity limits, either hard limits like a

certain number of campsites or visitation levels where congestion externalities begin to take hold

• Consider a park with a certain number of picnic sites q0; MC is constant; D1 is for weekday visitors and D2 is for weekend visitors

• Two prices are required: during the week, set p1 = MC. But this price will not work for weekends, because quantity at this price will be q2 which exceeds the capacity q0; then set price = p2 during the weekends, thus total costs = c + d + e, total revenue = a + b + c + d + e, and profit = a + b, or, still charge p1 on the weekends, but with nonprice rationing

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Figure 17-6, p.345

• A form of tourism involving visiting fragile, pristine, and

relatively undisturbed natural areas, intended as a low-impact and often small scale alternative to standard commercial tourism

• Its purpose may be to educate the traveler, to provide funds for ecological conservation, to benefit the economic development of local communities, or to foster respect for different cultures

• Since the 1980s ecotourism has been considered a critical endeavor by environmentalists, so that future generations may experience destinations relatively untouched by human intervention

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3. Ecotourism