Brown, Singh and Castle [3] introduced ... experience, Guedry [8] site characteristics, Brown ..... [2] Brown, William G., Farid H. Nawas and Joe B. Stevens.
SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS
JULY, 1977
DETERMINING THE ECONOMIC FEASIBILITY OF PUBLIC RECREATIONAL DEVELOPMENTS AT BEAVER LAKE, ARKANSAS*
Robert N. Shulstad and Thomas G. Sawyer
Beaver Lake is nestled in the midst of the Ozark Mountains in the northwest corner of Arkansas. The picturesque lake is actually a multi-purpose reservoir constructed and maintained by the U.S. Army Corps of Engineers. The 28,220 acre lake offers eleven improved public access areas for use by recreationists. Six additional recreational areas have been planned, to be built as demand requires [16]. Costs for development of the six additional parks were estimated by the Corps of Engineers as of July 1974, to be $6.87 million [16]. On initiation of this research, two methods for financing future recreational developments on reservoirs were available. The first method requires agreement of a local sponsor such as a state, county or city to pay at least 50 percent of the proposed recreational development costs and assume all costs for operations, maintenance and replacement of the facilities. The second method allowed 100 percent federal financing for recreational developments if a system of user charges could be expected to recover all operation, maintenance and replacement costs [15]. Research objectives were to determine: (1) total demand for and economic value of publically provided recreational areas on Beaver Lake, (2) the economic feasibility of adding to the present system and (3) the financial feasibility of local sponsorship through using a fee system. The choice of an appropriate recreation demand estimation technique was not an obvious one. Recreational administrators have generally estimated the value of a recreational development through measurement of the gross volume of business generated. While
the gross expenditure method generates large numbers, it lacks theoretical support. Many resource economists have turned to the Clawson-Hotelling procedure and have introduced a number of innovations. Brown, Singh and Castle [3] introduced income- and distance, Stevens [12] the quality of the experience, Guedry [8] site characteristics, Brown and Nawas [2] use of individual observations and Gum and Martin [10] influences of substitute recreational activities and a shifter variable representing tastes and preferences. For this analysis, the Gibbs methodology [5, 6, 7] was selected. Unlike the Clawson approach, the Gibbs procedure distinguishes between effects of travel costs and on-site costs on the quantity of recreation days demanded. Travel costs influence choice of making a trip or not, and limit the amount of funds available once the recreational site is reached. However, the same travel cost will be incurred whether the recreationist chooses to remain one day or five days. As long as the effective budget constraint allows choice of length of stay, deciding the number of days per trip will be based on effective on-site costs per day. The Gibbs methodology implies a critical price at which consumers would be indifferent between recreating or not recreating at the site. If prices exceed this "critical" price, the consumer would not recreate at all because he could gain more satisfaction through not incurring any travel expenses and using his total budget for other items. The'critical price' divides the spectrum of possible recreation prices into two mutually exclusive groups: prices at which the consumer would not recreate at
Robert N. Shulstad is Assistant Professor and Thomas Sawyer was Graduate Assistant, Department of Agricultural Economics and Rural Sociology, University of Arkansas.
*Paper presented to the Annual Meeting of the Southern Agricultural Economics Association, Atlanta, Georgia, February 7-9, 1977. Published with the approval of Director of the Arkansas Agricultural Experiment Station.
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the site, and prices at which the consumer would travel to the site in order to consume some recreation. Similarly, the number of recreation days associated with this critical price can be considered a "critical" level of consumption of recreation, since it divides the spectrum of recreation consumption into two exclusive groups: (1) levels of consumption less than the critical quantity which the consumer, given income and costs of transportation, would never volunteer to consume, and (2) levels of recreation which he would volunteer to consume. For a comparison of the Gibbs and the Clawson approaches see Edwards, Gibbs, Guedry and Stoevener, 1976 [5].
number of visits per year (X 7 ), the reciprocal of the number of recreationists in the party (X8 ), and the season of the year (D 1 ), spring; (D2 ), fall; (D3), winter. Recreation demand is hypothesized to be of a curvilinear nature and therefore the log form of the dependent variable was used. The following demand model was obtained where Z is the natural log of days per visit. Z = 0.07961 + 0.00510X1 * - 0.01491X 2 * + 0.00001667X 3 ** +0.32907X 5 + 0.0000796X
6
- 0.02173X 7 *
- 0.79835X 8 ** - 0.81361D1*
THE MODEL Sample and questionnnaire data were collected through personal interviews with 271 recreating parties, representing 871 recreationists from July 1974, through July 1975. The sample was stratified to reflect representative proportions of activity, season, access area and weekday versus weekendholiday participation based on 1973 visitation data received from the Corps of Engineers [13, 14]. A six page questionnaire was administered by graduate students through interviews at the eleven developed access areas. Questions concerned number and composition of each group, reason for visit, travel costs and on-site costs broken down by category, income, length and number of visits per year and amount of leisure time available. A series of direct questions concerning expected use of new parks and willingness to pay for activities at new parks were also asked. Since records and dates were critical to the accuracy of data concerning investment expenditures, the investment portion of the questionnaire was mailed to the participants after they returned home. Through use of a mail survey procedure developed by Christenson [3], a total response rate of 76 percent was obtained with a usable response rate of 58 percent. Ordinary least squares regression was used to estimate the demand for recreation days per visit (Y) as a function of travel costs per trip (Xi), on-site costs per day (X2 ), income (X 3 ), leisure time (X4 ), site characteristics (X5 ), investment cost (X6 ), the
- 0.41060D
2
** -1.06256D
F-Value + 11.7*
R
3
.44
* * **
.01 .05 .10 (1)
All predictive variables are significant at the ten percent level or less and carry the hypothesized sign. Leisure time is omitted from the model due to its correlation with income and size of group.' The demand function for the average Beaver Lake recreationist can be expressed in terms of price (on-site costs) by holding all other variables at their mean and solving equation (1) for days per visit. The average demand function is: 0.0491 2) Brown and Nawas [1] have shown that expansion of the average individual demand curve will underestimate the value of the recreational experience unless all individuals have exactly the same characteristics as measured by the other independent variables. To avoid this problem each individual's own characteristics were used in equation (1) and a demand curve estimated for each recreating party in the sample. The consumer's critical price was calculated by asking each repondent the minimum number of days he would spend at Beaver Lake per visit. By substituting the individual's minimum days into his demand function, maximum on-site costs a party of recreationists is willing to pay per day can be determined. 2
1While exclusion of the leisure time variable may result in specification bias within the model, its inclusion within the model definitely did result in multicollinearity problems. I have chosen to avoid the certainty of multicollinearity. Other researchers have hypothesized the importance of the leisure time variable. However, none have found it to be of great significance; thus, any specification bias would be minimal. 2 The following assumptions are implicit in the above argument: (1) the utility function of the consumer is such that recreation at the site can be expressed as one argument while all other goods and services, excluding transportation to the site, aggregated as Hicks-Allen "money" is the other argument, (2) the indifference curves appropriate to this utility function intersect the "money" axis but are asymptotic to the recreation axis or some line parallel to, but above, the recreation axis, and (3) the act of traveling to the site, in and of itself, is not a source of utility to the consumer [5, p. 7-8].
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The demand function for each party can then be integrated from actual on-site costs to critical price to determine the consumer surplus received by the party. 3 Following this procedure, individual consumer surplus estimates were summed and divided by the total sample to produce a mean individual consumer surplus of $70.43 per party visit. Since the sample was stratified by activity, season, park and weekdayweekend, the data received should be representative of user population. Visitation data show 391,954 party visits to improved access areas on Beaver Lake during 1974. Thus, net benefits of publicly provided outdoor recreation at Beaver Lake are estimated to equal $27,605,320. This is the value of benefits received net of actual costs to the recreationist.
ECONOMIC FEASIBILITY OF ECONOMIC FEASIBILITY OF NEW NEW PARKS PARKS Addition of new parks would be considered economically feasible if the value of discounted benefits received is greater than discounted costs incurred. Recreationists at the existing parks were shown a map designating proposed locations of six additional improved access areas on Beaver Lake. They were then asked if they would use the new areas if they were developed. If yes, would they spend more recreation days at Beaver if the new areas were developed? If yes, how many more? Recreationists who indicated they would use the new parks said they would spend an average of 2.17 additional days at Beaver. The average for the entire sample was .74 additional days per party per year. The value of net benefits received from these additional days can be considered the marginal benefits which could be attributed to the additional parks. Average net benefits received per party per visit was estimated to equal $70.43 while the average visit was 3.65 days. Net benefits per day were estimated to equal $19.30 per party. There were 41,258 recreating parties at Beaver Lake in 1974. Based on .74 additional days per party, $589,247 in net benefits per year could be anticipated from the additional parks. This figure assumes no substitution occurs from present parks to new parks and no increase in visitation other than the .74 days per year per party. Substitution from present
parks to new parks would undoubtedly take place, but would represent a transfer of benefits within the park system rather than an increase in benefits. The additional six parks are estimated to cost $6.87 million with annual operation, maintenance and replacement set at $43,455 per park. Assuming an eight percent discount rate and an expected life of 20 years, the marginal benefit-cost ratio for the six additional parks is .61. 4 Additional parks would not be economically feasible if they rely solely on increased visitation from present park users. This marginal benefit-cost ratio is important to the overall decisions made by the Corps of Engineers regarding construction of the six proposed parks. It would be the appropriate decision mechanism, assuming the present parks are adequate to meet normal increases in visitation (10.6 percent per year) which have been occurring and can be expected to continue. Present parks are beginning to reach capacity and cannot be expected to accommodate normal growth, thus benefits from this normal growth allowed with new parks must be considered in the benefit-cost analysis. Under conditions of limited capacity for increasing visitation the addition of six new parks would have a benefit-cost ratio of 3.05 and construction would be economically feasible. Economic feasibility does not assure financial feasibility. While total benefits received by users may exceed costs, only a discriminating monopolist would be able to secure revenues equal to total benefits. The Corps of Engineers or a local sponsor would be expected to charge a uniform fee to all users.
IMPACT OF A FEE SYSTEM The impact of a fee system on number of days demanded was determined for each party by substituting individual on-site costs plus change in costs into the demand function. If on-site costs per party are increased by one dollar, days per visit will decline by 0.04 days. This reflects the average of the individual changes in demand. Similarly, increases of $5 and $10 per day will decrease length of the average visit by 0.19 days and 0.36 days per visit, respectively. These decreases in number of days demanded with increases in on-site costs are as expected, not great. Once a recreationist has made the trip to the
3 The demand curve estimated using the Gibbs methodology may be referred to as a "more-or-less" demand curve, as it indicates the quantity of recreation consumed at various prices of recreation, given that the consumer chooses to recreate at all [5, p. 10]. On-site costs were adjusted for normal at home expenditures for food. 4 Six additional parks, while the palnned number, is not necessarily the optimal level of investment for the Corps to engage in, but given that this level of investment is being considered, the benefit-cost ratio should be greater than or equal to one for the investment to be made.
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area for a weekend or vacation, an additional $5 or $10 per day will not send him home. However, knowledge of a fee system which adds to on-site costs could be expected to influence the decision to make the visit. This impact is examined in the visits model. Visits per year
13.18 - 0.0697X 1 * - 0.3581X 3 * - 0.000021X 3 - 1.9514X 5 -0.000345X 6 + 2219X* - 2.1820D 1 - 2.4643D 2 + 28.490D 3 * F- Value = 10.3'
R2 = .39
(4)
By holding all variables except on-site costs at their means, the following equation for number of visits per year is generated: Visits per year - 13.5598 - 0.35812X2
(5)
Under the present fee system, average number of visits per year is 9.51. By increasing on-site costs by $1.00 per day, visits drop to 9.15. Additional fees of $2.50 and $5.00 per day would decrease the number of visits per year per party by .90 and 1.79, respectively. By examining effects of changes in on-site costs on both visits and average days per visit, the overall impact on recreation days per year can be determined. This joint effect is shown in Table 1 along
with the total revenue which could be generated per party per year through use of the additional fee. In 1974, an estimated 1,431,653 camping days were spent at improved access areas on Beaver Lake. While a certain amount of on-site costs were incurred there were no use fees charged. If a use fee of $2.50 per day per party had been imposed, it is estimated that only 1,262,907 recreation days would have been demanded, generating revenues of $3,157,475.00. If fees were increased to higher levels, days spent will decrease, but total revenues will continue to increase up to a user fee of $12 per day per party. Based on the estimated demand functions, visitation would drop from its present 35 recreation days per party per year to 16.8 days per party per year. The maximum total revenue which could be produced from a uniform fee at improved access areas is estimated to be $8,300,000. In 1975, the Corps of Engineers imposed a fee of $2.50 for camping at improved access areas. The demand model would have projected a decrease of 6 percent in visitation, other things equal. Actual visitation decreased by 8.6 percent.
FINANCIAL FEASIBILITY FOR LOCAL SPONSOR Under present requirements, the Corps of Engineers will develop a new park if a local sponsor will provide fifty percent of the construction costs and
TABLE 1. EFFECTS OF CHANGE ON-SITE COSTS ON AMOUNT OF RECREATION DEMANDED AND TOTAL REVENUE PER PARTY, BEAVER LAKE, 1974 a Added
Change in Length of
Fee/Day $ 0.00/day 1.00 2.50 5.00 10.00 11.00 12.00C 13.00 20.00 25.00
Change in Number of
Visit
Recreation Days Demanded per
Visits/Year
Total Revenue per
Party/Yearb
Party/Year
.00 days -. 04 -. 10 -. 19 -. 37 -.40 -.43 -. 46 -. 68 -. 82
.00 visits -0.36 -0.90 -1.79 -3.58 -3.94 -4.30 -4.66 -7.16 -8.95
34.70 33.04 30.61 26.71 19.47 18.11 16.77 15.47 6.98 1.58
0 33.04 76.53 133.55 194.78 199.24 201.31 201.08 139.53 39.47
NOTE: Mean recreation days demanded per year was 34.70, mean visits per year was 9.5096, mean length of visits was 3.6494 days. Recreation days (column 4) is derived by multiplying the length of visit at the increased fee times the number of visits per year at the increased fee. For example: an added fee of $12 per day will decrease length of visit by 0.43 days and number of visits by 4.3 visits. These decreases make the length of visit 3.2194 days (3.6494 - .43) and the number of visits 5.2096 (9.5096 - 4.3). By multiplying these figures (5.2096 x 3.2194) the number of recreation days per party per year (16.77) is obtained. aAssumes fees at similar sites on other lakes in the region would also be increasing to maintain a competitive price situation within the recreational industry. No allowance has been made for the impact of the decrease in number of visits on the length of the visit. As a result the actual impact of price changes on total recreation days demanded per year is over-estimated and the number of recreation days per party estimated in the table is biased downward. CFee that generates maximum revenue.
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provide for operation, maintenance and replacement once constructed. The question is whether adequate revenue can be generated to cover these expenses. Total visitation to improved access areas at Beaver has increased at an average rate of 10.6 percent from 1967 through 1974. However, present parks are beginning to reach capacity and cannot be expected to accommodate this normal growth in visitation. Based on the 10.6 percent normal growth rate, 118,285 additional camping days could be expected at new parks during 1977. Based on the $2.50 per day per camping party fee now in effect, an annual revenue flow of $295,713 would result. Two new parks would be required to accommodate this growth, given present visitation at existing parks of 101,445 camping days per year per park. Average construction costs are estimated to equal $1,145,000, implying a cost to the local sponsor of $572,500 per park plus $43,455 for operation, maintenance and replacement costs per year. Assuming a 20-year life and an eight percent discount
rate, the local sponsor revenue-cost ratio would equal 1.45 to one. Substitution from existing parks to new parks would increase this ratio. Thus, construction of two additional parks on Beaver Lake is found to be both economically feasible for construction by the Corps of Engineers and financially feasible for participation of a local sponsor on the 50:50 plan, provided present parks are near capacity. The revenue-cost ratio considering both federal and local costs is .92 to one. Present regulations do not require an examination of financial feasibility at the national level, however. Recreation demand at Beaver Lake, Arkansas was estimated through use of the Gibbs methodology. Unlike the Clawson approach, it allows for the differential impacts of travel costs and on-site costs on the demand for recreation days per visit. The estimate of benefits received from recreation are of the same general magnitude as those developed through the gross expenditure method or the Clawson approach as modified and used by Gum and Martin [9].
REFERENCES [1] Brown, William G. and Farid Nawas. "Impact of Aggregation on the Estimation of Outdoor Recreation Demand Functions," American Journal of AgriculturalEconomics, 55, 246-59, 1973. [2] Brown, William G., Farid H. Nawas and Joe B. Stevens. The Oregon Big Game Resource: An Economic Evaluation, Corvallis: Oregon State University, Special Report 379, 1973. [3] Brown, William G., Ajmer Singh and Emery N. Castle. An Economic Evaluation of the Oregon Salmon and Steelhead Sport Fishery, Corvallis: Oregon State University Press, 1964. [4] Christenson, James A. A Procedure for Conducting Mail Surveys with the General Public, Raleigh: North Carolina State University, 1974. [5] Edwards, J. A., K. C. Gibbs, L. J. Guedry and H. H. Stoevener. "The Demand for Non-Unique Outdoor Recreational Services: Methodological Issues," Technical Bulletin 133, Agricultural Experiment Station, Oregon State University, Corvallis, Oregon, May 1976. [6] Gibbs, Kenneth Charles. The Estimation of RecreationalBenefits Resulting from an Improvement of Water Quality in Upper Klamath Lake: An Application of a Method for Evaluation the Demand for Outdoor Recreation, Ann Arbor: University Microfilms, Inc. 1969. [7] Gibbs, Kenneth Charles and John F. McGuire, III. "Estimation of Outdoor Recreational Values," Gainesville: Food and Resource Economics Department, University of Florida, Economic Report 53, 1973. [8] Guedry, Leo Joseph, Jr. The Role of Selected Population and Site Characteristicsin the Demand for Forest Recreation, Ann Arbor: University Microfilms, Inc., 1970. [9] Gum, Russell L. and William E. Martin. "Problems and Solutions in Estimating the Demand for and Value of Rural Outdoor Recreation," American Journal of Agricultural Economics, November 1975. [10] Martin, William E., Russell L. Gum and Arthur H. Smith. "The Demand for and Value of Hunting, Fishing and General Rural Outdoor Recreation in Arizona," Tuscon: Agricultural Experiment Station, Technical Bulletin 211, 1974. [11] Pindyck, Robert S. and Daniel L. Rubinfield. Econometric Models and Economic Forecasts, New York: McGraw-Hill, 1976. [12] Stevens, Joe Bruce. A Study of Conflict in Natural Resource Use: Evaluation of RecreationalBenefits as Related to Changes in Water Quality, Ann Arbor: University Microfilms, Inc., 1966. [13] U.S. Army Corps of Engineers. Monthly Recreational Visitation Data, Project-BeaverLake, Little Rock: Southwestern Division, Corps of Engineers, 1973.
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[14] U.S. Army Corps of Engineers. Monthly Recreational Visitation Data, Project-BeaverLake, Little Rock: Southwestern Division, Corps of Engineers, 1974. [15] U.S. Army Corps of Engineers. Draft-Operation and Maintenance Environmental Statement-Beaver Lake, Arkansas, Little Rock: Southwestern Division, Corps of Engineers, 1974. [16] U.S. Army Corps of Engineers. Updated Master Plan for Beaver Lake, July 1975, Little Rock: Southwestern Division, Corps of Engineers, 1975.
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