Invasive Species and Endogenous Risk

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Invasive Species and Endogenous Risk David Finnoff,1 Chris McIntosh,2 Jason F. Shogren,1 Charles Sims,3 and Travis Warziniack4 1

Department of Economics and Finance, University of Wyoming, Laramie, Wyoming 82071; email: [email protected]

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Department of Economics, Labovitz School of Business and Economics, University of Minnesota, Duluth, Minnesota 55812

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Department of Applied Economics, Utah State University, Logan, Utah 84322

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Alfred-Weber Institute, University of Heidelberg, D-69115 Heidelberg, Germany

Annu. Rev. Resour. Econ. 2010. 2:77–100

Key Words

First published online as a Review in Advance on June 2, 2010

prevention, bioeconomics, trade, real options, valuation

The Annual Review of Resource Economics is online at resource.annualreviews.org This article’s doi: 10.1146/annurev.resource.050708.144212 Copyright © 2010 by Annual Reviews. All rights reserved 1941-1340/10/1010-0077$20.00

Abstract Invasive species policy is an economic issue. People affect the spread of invasive species, and these invaders affect people. This review discusses bioeconomic modeling using endogenous risk theory to capture the idea of jointly determined ecological and economic systems. This perspective adds precision to risk assessment and cost-benefit estimation. Bioeconomic modeling can help increase the chance of developing policies that promote better invasive species protection at lower cost. Several key points emerge. Differentiating between import- and export-related externalities determines the ability of agents to manage risk. A manager has four general economic strategies to mitigate invasive species risk and associated damages: prevention, eradication, control, and adaptation. When flexibility and timing play a critical role, a real options framework becomes the more appropriate analytical framework relative to traditional cost-benefit analysis. For many invasive species, valuation exercises will involve eliciting preferences to delay in the inevitable invasion and spread.

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Endogenous risk: the notion that people invest resources to reduce the risks they confront or create

1. INTRODUCTION An invasive species is a nonnative species that causes damages beyond any attendant benefits (Elton 1958, Kareiva 1996). Invasive species are increasing worldwide and are a leading cause of global environmental change, e.g., biodiversity loss and ecosystem malfunction (see, e.g., Mack et al. 2000, Sala et al. 2000, Lodge 2001). At least 4,500 species, including plants and animals, are estimated to be nonindigenous in the United States (Rosenzweig 2001). The zebra mussel (Dreissena polymorpha), a well-known example, is an invasive freshwater mollusk that has spread across eastern North America and is now threatening inland lakes and western river basins (Bossenbroek et al. 2007). Invasive species policy responses have expanded in scope and magnitude. For instance, President Clinton signed Executive Order 13,112 on invasive species in 1999 to stress the need to “minimize the economic, ecological, and human health impacts that invasive species cause” [see the Global Invasive Species Programme (GISP) Web site (http://www.gisp. org), Miller & Fabian 2004; see also FICMNEW 1998, CENR 1999, and NISC 2001]. In addition, the World Trade Organization (WTO) Agreement on Sanitary and Phytosanitary (SPS) Measures now allows countries to propose trade restrictions to prevent invasive species introduction (Sumner 2003; see, for instance, Calvin & Krissoff 1998, Josling et al. 2004, and Peterson & Orden 2008). In general, however, invasive species policy has been dominated by the biological sciences and related disciplines. As a consequence, invasive species policy continues to be developed today using inadequate economic reasoning (see, e.g., Barbier 2001, Keller et al. 2009). Economic reasoning matters, however, because individual and collective choices driven by relative prices and wealth affect how invaders spread within and between lands. Historically, economists interested in biological nuisances have focused on agricultural pests (Lichtenberg & Zilberman 1986, Archer & Shogren 1996). The past decade, however, has witnessed a significant change in perspective.1 More economists are now applying or being asked to apply economic principles to define the costs and benefits from invasive species (see, e.g., Perrings et al. 2002, Keller et al. 2009).2 Economics matters for invasive species management for two key reasons. First, invasive species are as much an economic problem as a biological one. People invest scarce resources to prevent and control the risks that invasive species pose to ecological and economic systems. Understanding how people invest depends on what they know about both economic and biological parameters and what they know about the systematic relationships and feedback loops within and between the two systems. The framework of endogenous risk can be used to frame the question on how to best manage the prevention and control of invasive species. The approach accounts for uncertainty, both biological and economic circumstances of invasions, and the feedbacks between the two systems. Within this framework, one can investigate how changes in a decision maker’s preferences for time and risk influence the optimal mix and timing of prevention and control. Studies suggest that the need for integration within and between disciplines matters, but not in every dimension and with varying degrees of magnitude. The endogenous risk framework is inclusive. The approach allows one to bring what matters behaviorally and formally into

1

Lovell et al. (2006) and Olson (2006) examine economic work on aquatic and terrestrial invaders.

2

See the special issues in Ecological Economics, Vol. 52 (2005), and Agricultural and Resource Economics Review, Vol. 35 (2006).

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the discussion on invasive species: preferences for risk and for risk reduction technology, today and into the future. Second, research to estimate the welfare impacts of invasive species remains a highpriority item. Invasive species pose real challenges—we are valuing a weak-link public good that is to a certain degree both ambiguous and inevitable. We are not valuing a clear and present danger. Some invasive species have an ambiguous value because people think they are beautiful (e.g., the mute swan, rhododendron) or because they make lake water clearer (e.g., zebra mussels). Some invasions also seem inevitable. Trade and trade routes between regions are a primary vector in the spread of invasive species. More shipping generally means more invaders introduced into these regions. Following invasion, inland spread threatens regional lakes and rivers that tend to provide market and nonmarket values for a region’s inhabitants. As these resources are usually degraded by the invasion, there may be incentives for government intervention or for people to self-protect. Because it is in large part economically and politically infeasible to eliminate trade, invasions are more than just likely; they are inevitable. This review explores some key issues in the economics of invasive species. We use endogenous risk as the motivating framework to guide our discussion. We briefly discuss alternative approaches and direct the interested reader to parallel reviews. Our review starts with a description of the problem in a classical setting with trade-driven invasions and trade-related policy responses. We then generalize the problem to include joint determination and risk reduction strategies through the lens of endogenous risk. In this more encompassing setting, the issues of policy flexibility and timing of actions come to the forefront, as does the necessity of market and nonmarket valuation. We focus on numerous ideas that have emerged over the past decade: links and feedback loops between economic activity and invasion (Shogren 2000, Finnoff et al. 2005), definitions of the consequences (Pimentel et al. 2000, Zavaleta 2000), population dynamics and spatial spread (Sharov & Liebhold 1998a, Brown et al. 2002, Eiswerth & Johnson 2002, Gutierrez & Regev 2005, Potapov et al. 2007, Wilen 2007, Finnoff et al. 2008), strategies of risk reduction (eradication, prevention, adaptation, and control) (Leung et al. 2002, Costello & McAusland 2003, Knowler & Barbier 2005, Margolis et al. 2005, Kim et al. 2006, Olson & Roy 2008), behavioral reactions to invasions over time (Settle & Shogren 2004, Finnoff et al. 2007), and uncertainties inherent in the biological chain of invasions (Eiswerth & van Kooten 2002, Horan et al. 2002, Olson & Roy 2002, Costello et al. 2007).

Joint determination: economic and biological systems in which human choices affect nature and nature affects human choices. Bioeconomic models are used to capture the links between and within the economic and biological systems Eradication: economic investments to reduce the probability of species introduction and establishment Prevention: economic investments to reduce the probability of invasive species transport Adaptation: economic investments to lower the economic consequences of realized damages Control: economic investments to lower the probability that damages occur given that an invasion has occurred

2. INVASIVE SPECIES ECONOMICS: A CLASSICAL FRAMEWORK The challenges of invasive species are complicated because they are weak-link public goods that are both ambiguous and inevitable. Even if we follow the definition that a species is nonnative and causes damages beyond any benefits, there are obvious ambiguities. Some invasions also seem inevitable. Invasive species spread through one ecosystem’s contact with another, through natural vectors (e.g., species migration, wind, ocean currents), and through human-mediated vectors such as the ballast water of cargo ships (e.g., Hengeveld 1989, Liebhold & Tobin 2008). We illustrate these views of species invasion with a static framework shown in Figure 1, reflecting the role of human-induced spread through trade within the literature. Trade is just one vector (McClure 1990). Our analogy holds, however, for any exchange between ecosystems, and we expand our modeling to other drivers of invasion in subsequent sections. www.annualreviews.org

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Figure 1 Invasive species impacts in a trade-based framework. (a) Net impacts of trade are negative due to large damages in industry Y. (b) Net impacts of trade are positive. Because damages in industry Y are low, gains from trade are larger than losses from the invasion. The impact to industry Y is equal between panels a and c, but the production mix, which is skewed toward the unaffected sectors, ultimately limits the economy’s exposure to damages. Gains from trade are larger than losses from the invasion.

In the familiar trade story, a closed economy is bound by its production possibilities frontier PPF0, whose slope is given by the marginal rate of transformation. In Figure 1a, the closed-economy equilibrium occurs where the marginal rate of substitution equals the marginal rate of transformation, shown by point a and the tangency of indifference curve I0 and PPF0. Trade allows agents within the economy to buy and sell at world prices p ¼ px/py. In Figure 1, the relative world price of good Y is higher than the domestic price. With the possibility to trade, production of good Y will increase, and production of X will decrease. Production is shifted along the production possibilities frontier until 80

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the marginal rate of transformation equals world prices, a0 . The line defined by world prices and tangent to the production possibilities frontier at this new point of production defines the economy’s trade line, or consumption possibilities frontier. It is the value of domestic production (at point a0 ) at world prices. All points along this line are possible for consumption. Optimal consumption occurs at the highest indifference curve tangent to the new trading constraint. At this new trading equilibrium, the marginal rate of transformation equals relative world prices, which equal the marginal rate of substitution, shown by point b in each panel of Figure 1. Trade is represented by the difference in consumption and domestic output. Good Y is exported and good X imported. In Figure 1, the difference between utility achieved at points a and b represents gains from trade from extended consumer choice and increased value of domestic production. But with trade comes the invader, represented in the model as an inward shift of the production possibilities frontier due to a real loss in resources. For simplicity, assume that one sector of the economy is affected (good Y), leading to the production possibilities frontier with an invasion PPF1. In the open economy, production occurs at c0 , and consumption occurs at c. Policies aim to push point c as far out as possible, and the literature can be divided into studies on the relative size of damages (Figure 1a versus Figure 1b) or studies on relative exposure to damages (Figure 1a versus Figure 1c). Panels a and b of Figure 1 differ in the size of damages relative to gains from trade, where damages (or expected damages) may be a function of trade volume. Policies designed to increase the likelihood of the scenario in panel b over the scenario in panel a focus on prevention. They either reduce the volume of trade through quotas and tariffs or impose technology restrictions, such as port inspections and cleaning, that reduce expected damages. Examples of studies between panels a and b include McAusland & Costello (2004), Knowler & Barbier (2005), and Me´rel & Carter (2008). Knowler & Barbier consider profits of domestic firms that sell invasive plants. Because private firms do not internalize damages, the market equilibrium number of firms exceeds the optimum. Imposing a tax on firms reduces the profits of the marginal firm, leading to an overall decrease in the size of the industry. McAusland & Costello model gains from trade through consumer surplus from imports. Again, tariffs are set at the Pigovian level to compensate for damages plus inspection costs. Inspections, however, prevent entry of contaminated goods, restricting supply and raising prices. If contamination rates are high enough, it may be optimal not to inspect, allowing invasions to occur and taxing to recover the damages (see also Margolis et al. 2005). Me´rel & Carter (2008) show that when importers can clean their cargo before arriving in port, the optimal policy mix is a two-part tariff with inspection. A uniform tariff should be levied on all import goods, and a fine should be imposed on contaminated goods. Importers react to the fine, making risk endogenous. Fines are similar to the tradable risk permits proposed in Horan & Lupi (2005). Permits define allowable risk of invasive species, determined by ship characteristics and cleaning technologies. Permits are tradable, provided that total risk of the vessel stays below a given level. Both policies define acceptable risk levels and provide flexibility to find low-cost solutions. Comparison of panels a and c of Figure 1 shows the effect that relative prices have on an economy’s exposure to damages and ability to adapt. In panel a, world prices lead to a domestic production mix heavy in the sector susceptible to damages. In panel c, production is skewed away from the susceptible sector. Because tariffs affect the relative prices, they www.annualreviews.org


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can be used to influence the domestic production mix and to mitigate damages (Costello & McAusland 2003). Tu et al. (2008) show that current tariff structures distort trade toward vectors likely to harbor invasive species (e.g., imports of raw production inputs). They model tariffs’ effect on exposure to damages (Figure 1a,c) and the probability of invasion (Figure 1a,b). Work in trade and invasive species has focused on externalities introduced through imports and has not addressed contact with trade partners through exports and trade in domestic services. Externalities from exports come from a number of sources. Domestic ships, planes, and automobiles can become contaminated while visiting other regions and can bring unwanted pests home, and species can be introduced by contaminated visitors who enter a region to consume goods and services. Consumption of goods and services by nonresidents is modeled as exports; money flows from outside the region to local firms and households.3 Differentiating between import-related externalities and export-related externalities determines the ability of agents to manage the associated risk. Because exports are produced with local factors of production, levying a tax on exports reduces an agent’s comparative advantage, shown by a rotation in the price line, and limits gains from trade. Declines in domestic production, and local income, can be large enough to offset any welfare gains from correcting the environmental problem. If demand for exports is elastic, the agent trading must choose between gains from trade and reduced risk of introduction of invasive species. It cannot have both. If demand is inelastic, the agent can levy tariffs to compensate for damages but can do little to affect risk of invasion. Consequences of a ban on export trade are graver. Income is reduced without raising tax revenues to compensate for the loss. Expected damages must be larger than income generated from the trade good to justify the ban. Traders who have options will avoid trade restrictions in one market by trading elsewhere. If policies are uncoordinated, aggregate risk may rise. This framework highlights how trade-based invasive species policies are second best. Because the externality arises from the market, rather than from a particular source, risk cannot be directly managed. Tariffs and quotas target the market good associated with the externality, and cleaning technologies such as ballast exchange and port inspections target trade vessels. Proposed policies cause multiple adjustments in the system and cannot be designed to reflect the heterogeneity in risk among trade partners and trade vessels. The problem can be further exacerbated by preexisting market distortions and strategic interactions between trade partners. This invasive-trade dichotomy is representative of the damage function (DF) approach to examining invasive species (see Freeman 1993). The DF approach assumes that the economic system and the ecosystem affect each other in a one-sided way. A change in the economic system is viewed as changing the pressure on the ecosystem, or a change in the ecosystem is viewed as changing the economic system. The DF approach does not address joint determination, the two-way interactions between human and natural systems (see Crocker & Tschirhart 1992, Settle et al. 2002, Barbier & Shogren 2004, Finnoff & Tschirhart 2008). We now frame the invasive species challenge as a problem of joint determination and endogenous risk.

3

See, for example, Melvin (1989), van Marrewijk et al. (1997), Copeland (2002), and Deardorff (2005). The tourism industry, for example, can be described by purchases of domestic goods and services by nonresidents.

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3. JOINT DETERMINATION AND ENDOGENOUS RISK When an ecosystem changes, people change their behavior, which in turn reshapes the ecosystem. Ecosystem changes alter human productivity in the economic system. People recognize the change in their productivity when using the ecosystem, and they adapt, either by adapting the environment or by adapting to the environment. When people adapt, they alter the pressure on the ecosystem, leading to further changes in the ecosystem. The cycle continues. Recent work has addressed whether an explicit accounting of feedback links between the two systems yields different policy-relevant results compared with when no joint determination is assumed. The work has proceeded in deterministic settings using optimal control and in stochastic settings using endogenous risk. We discuss the optimal control approach and then turn to an endogenous risk framework to examine invasive species economics in greater detail. The optimal control approach as applied to invasive species warrants its own review article. Optimal control theory is the standard deterministic approach for renewable resources, which incorporates joint determination as the influence of economic choices (controls) on ecological states (invader populations) and the influence of ecological states on economic choice (through the dynamic objective functional).4 The invasive species problem transforms a basic renewable resource problem by choosing control to maximize the negative of a discounted stream of damages and control costs. The result is an optimal path for control that is monotonic in invasion size (on the limits, see Olson & Roy 2008). The models capture the interaction of state variables (e.g., invader abundances) and control variables (policy choices, prevention, eradication, and control) over time and in equilibrium (steady states). Optimal control theory captures costly policy trade-offs. One limit to the deterministic optimal control approach is its restricted ability to address the stochastic endogenous nature of the problem. The approach rarely captures the risk of invasion; the probable establishment, spread, and diffusion; or the ability to alter the probability and severity of damage through eradication, prevention and control. These limits are why we focus on the endogenous risk method in our work and in this review. In Section 4, we address the idea of stochastic control in more detail within a real options framework; in Section 5, we consider the value of delaying the inevitable invasion. The economic perspective of endogenous risk—merged with population ecology—can provide a framework for bioeconomic risk assessment5 (see Shogren 2000, Leung et al. 2002). Endogenous risk captures the risk-benefit trade-offs created by jointly determined ecosystem conditions, species characteristics, and economic circumstances. The method provides a flexible tool to study the trade-offs between changing the odds of a good event occurring and decreasing the severity of bad events should they occur (Ehrlich & Becker 1972). Endogenous risk stresses that management priorities depend on both the tastes of the manager (preferences over time and for risk bearing) and the technology of risk reduction (prevention, control, and adaptation matter for optimal reduction strategies). If initial 4 See Lewis et al. (2009) for a basic description; examples include Barbier (2001), Eiswerth & Johnson (2002), Olson & Roy (2002, 2008), Burnett et al. (2006, 2008), Kim et al. (2006), and Potopov et al. (2007). 5 An alternative approach is general equilibrium ecosystem modeling (GEEM), as discussed in Tschirhart (2009). GEEM’s appeal is the model’s ability to capture feedback effects between and within economies and ecosystems. For example, Finnoff & Tschirhart (2008) link a dynamic economic computable general equilibrium model with a dynamic general equilibrium ecosystem model. They apply the model to the Alaskan economy to value the welfare consequences of endangered Steller sea lion recovery measures via alternative pollock quotas. Two ecosystem services, fishing and recreation, are linked to an eight-species marine ecosystem.

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biological circumstances are held constant, managers with different preferences will choose different mixes of prevention and control. How different tastes affect technology choice, however, remains an open question in invasive species management. Because invasions and their management are multiperiod compound lotteries over space, the optimal solution can benefit from an endogenous risk perspective. Consider a benevolent manager who allocates scarce resources to maximize expected social welfare subject to the risk of invasion. Let the general circumstance of invasive species be the management of an impure public bad. Consider mobile invasive species with numerous transportation pathways such that private citizens or firms cannot control the entry of the invasive species into the overall system (e.g., zebra mussels entering into the Great Lakes in the ballast water of ships). Once introduced and established, the invader may cause adverse impacts. The manager can partially control future invasions and the growth of the invader through prevention, eradication, and control strategies, given uncertainty in the “kill function” (Feder 1979). The manager can also adapt to the invader to ensure against damages. Damages occur if the invader traverses a number of interrelated processes: transport, introduction, survival/establishment, and growth of the invader. Not all species that invade become established, and not all established invaders cause damages (see Williamson & Fitter 1996). Following Jerde & Lewis (2007), Figure 2 describes the biological chain of the invasion process with a mapping of potential economic strategies. An invader may be in any of the states, which are connected by the relevant ecological process. Most economic strategies influence the ecological processes, although strategies may exist to alleviate the consequences of any state (damages are the relevant state here). The invasion process can be described as the transport of individuals from a source population N. A fraction of those species transported survive (with probability PT), providing a dispersion pool. A fraction of the dispersal pool is introduced into locals (with probability PI). The invader can spread from the dispersal pool, with a further fraction (with probability PS) causing damages. To combat the risks of invasion and to reduce the probability of damages, the resource manager can employ prevention S to reduce the probability of transporting species so PT (S). For individuals that survive and form a dispersal pool, the manager can employ

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Flow diagram of the invasion process. Finnoff et al.

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eradication R to reduce the probability of introduction and establishment, PI(R). For the individuals that survive introduction and eradication with the potential to spread, the manager controls C to reduce the probability of damages so that PS(C). Finally, if individuals survive through each control process, the economic consequences of the realized damages can be alleviated by adaptation A. The manager adjusts each strategy over time, making S, R, C, and A and all probabilities functions of time. This analysis implies that a time profile underlies each of the managed ecological processes. Assume that once a species survives transport (at time t), the system is considered invaded. Figure 3 illustrates the timing dimension of the problem alongside likely periods relevant to the employment of each strategy. Once states have been achieved, their uncertainty has been resolved. In Figure 3, time to the manager is split in two periods: preinvasion and postinvasion. The time of invasion t is a random variable in which the manager’s investments in prevention buy the manager time and delay an invasion. The stochastic timing of invasion is related to prevention, making prevention a problem of optimal stopping. In preinvasion, there are no damages, although costly investments in prevention help avoid or delay future damages. After an invasion, damages and severity are random variables conditional on the progression through the invasion process, which depends on eradication, control, and adaptation. The manager faces an optimal stopping problem within a multi-instrument, stochastic control problem. If an invasion occurs, the system is changed irreversibly (although eradication can exist). We treat prevention as a problem of optimal timing. Choices over strategies following an invasion are ex ante or made before uncertainty is resolved on the introduction and survival processes. Given the temporal uncertainty, the appropriate Strategy S

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Figure 3 Strategies and timing of the invasion process. Solid lines indicate the strategy from an economic perspective, and dashed lines indicate possible strategies over time. www.annualreviews.org


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solution method is backward induction: consideration of the postinvasion decision problem, followed by the preinvasion problem given the postinvasion solutions.

3.1. Postinvasion Following an invasion at t, the manager’s problem is to choose R, C, and A to maximize discounted expected utility of net social wealth (Finnoff et al. 2007):

JjE½t

8 9 Z1 < Zb = PS ðC, yÞVi þ 1 PS ðC, yÞ Vn dFðyÞ þ 1 PI ðRÞ Vn dt, ð1Þ ¼ ert PI ðRÞ : ; a

E½t


where r is the discount rate and the expected date of invasion t is taken as given (where E is the expectation operator). All variables are a function of time. We include risk attitudes with a von Neumann–Morgenstern utility function V defined over states with no damages from invasion Vn ¼ Vn(M c(R, C, A)) and states with damages Vi ¼ Vi(M c(R, C, A) D(A, y)). M is endowed social wealth; c(R, C, A) is the cost function for eradication, control, and adaptation efforts; and D(A, y) is the money equivalent of realized damages. Damages are a function of adaptation (or self-insurance) and a stochastic variable y. y is a random variable that reflects the basic scientific uncertainty about the impact of invasive species. This variable is crucial—it reflects the state of knowledge about the causes and effects of exotic invaders. F(y) is the cumulative distribution of y bounded over the support [a,b], which defines the mean and variance of the random variable and represents basic scientific uncertainty in damages. Optimizing Equation 1 remains a significant challenge. If we assume that the problem is autonomous, and we consider a single period in the dispersal pool state, the optimal singleperiod decision rules are 8 b 9 U Assuming U X utility losses from market or nonmarket damages value an incremental delay.12 McIntosh et al. (2010) conducted a national survey to elicit people’s market and nonmarket economic values to delay inevitable invasive species damages. Participants were asked to consider all lakes and rivers within a 100-mile radius from their home in their valuation. They were given information on the impacts from aquatic invasive species. Respondents were informed that all lakes and rivers in their region would be invaded; the only question was when. Under the assumption that all species invade simultaneously, the aggregated donations for all U.S. households ranged from $4 billion to $25 billion for freshwater aquatic invasive species, depending on whether the delay was one or ten years. By comparison, the federal government currently (as of 2006) spends $394 million annually for all (freshwater, marine, and terrestrial) invasive species prevention and detection.13

6. CONCLUSION We conclude our review of invasive species economics with one caveat. Our review does not discuss the two-way link between invasive species control and habitat conservation. Policies that reduce the chance of invasion will likely preserve habitats that would be fundamentally altered by invasion, providing an unintended benefit of policies of 12 The changes in environmental quality due to the invader and the economic value of these changes are a function of the substitution pattern between environmental quality and market goods (Carbone & Smith 2008). Our implicit assumption is that environmental quality and the market goods are perfect substitutes. If one relaxes this assumption, willingness to pay can change in magnitude and sign. 13 Some work has been made to include both market and nonmarket effects in general equilibrium models (e.g., Carbone & Smith 2008). Early work suggests that including market impacts in the study of zebra mussel invasion leads to a tenfold increase in damages in the Pacific Northwest and a fivefold increase in damages in the Great Lakes over analysis with just market impacts.



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prevention. In turn, habitat destruction increases the risk of species invasion and has been seen to be the primary cause of biodiversity loss around the globe. Given limited conservation dollars, smart conservation of habitat may achieve multiple policy goals. For example, many invasive species flourish along the edges of the habitat reserve. Invasive plants can penetrate the habitat reserve for up to 5 km, reducing the quality of the habitat along the edge. Also, the habitat edges are susceptible to nest parasitism and increased threat of endangered species to predation by invasive species. To mitigate the influence of invasive species, many scientists have recommended designing habitat reserves that maximize the portion of the conserved acres that attribute to the core habitat area as opposed to the share for which habitat quality is jeopardized due to edge effects. Designing habitat reserves to minimize edge effects reduces the predation of invasive species and creates larger core habitat areas, providing endangered species with the greatest probability of survival. The idea is to study cost-effective incentive mechanisms to agglomerate habitat— private, public, or both—to minimize edge effects and risks to native species.

SUMMARY POINTS 1. Invasive species is an economic issue, even if historically the biological sciences have dominated policy decisions. Today both policy makers and researchers recognize the idea of joint determination—people affect nature, and nature affects people. Bioeconomic modeling captures both biological and economic variables and the feedbacks within and between the systems. This perspective adds precision to risk assessment and cost-benefit estimation. Bioeconomic modeling can help increase the chance of developing policies that promote better invasive species protection at lower cost. 2. Differentiating between import- and export-related externalities determines the ability of agents to manage the associated risk. Trade-based invasive species policies are necessarily second best, however, because the externality arises from the market’s existence rather than from a particular source. 3. Both optimal control and endogenous risk theory can be used to capture the idea of jointly determined ecological and economic systems. Endogenous risk theory captures the risk-benefit trade-offs created by jointly determined ecosystem conditions, species characteristics, a portfolio of protection strategies, and economic circumstances. 4. A manager has four general economic strategies to mitigate invasive species risk and associated damages: prevention, eradication, control, and adaptation. Prevention reduces the probability of species transport. Once species are transported, eradication reduces the probability of species introduction and establishment. Once species are established, control reduces the probability that damages occur. Once damages occur, the economic consequences of these damages can be alleviated through adaptation. 5. Prevention and control decisions are made under conditions of uncertainty and irreversibility, making the timing of actions a key policy parameter. When flexibility and timing play a critical role, a real options framework becomes the more appropriate analytical framework relative to traditional cost-benefit analysis.

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6. Existing estimates of the benefits and costs of invasive species have been derived by summing up replacement costs. Replacement cost estimates, however, do not reflect welfare measures of economic value that capture interactions within the economy and between the economy and the natural world.


FUTURE ISSUES 1. Space and transferability: Studies typically abstract from spatial issues, and those that address space assume a closed spatial domain and a single decision maker. In reality, the spatial scale of biological invasions encompasses multiple decision makers who are linked through the movement of the species over space. Space affects decision making and should be addressed more explicitly to help formulate better corrective mechanisms. 2. Trade and transferable risk: Producers facing import bans from one country are challenged to find other trading partners, shifting the risk of invasion from one location to another and providing a new source of invasion. Aggregate risk depends on the degree of economic integration and the prevention policies of each trade partner. 3. Real options: Because invasive species problems are uncertain and irreversible, a key issue in policy decisions is to better understand the demand for flexibility and timing of risk reduction investments, e.g., prevention, eradication, control, and adaptation. Real options theory provides one tool to further explore how decision makers trade off near-term action versus waiting to gather more bioeconomic information. 4. Multiple species and budget constraints: The first-best policies are infeasible due to the presence of multiple invaders and limiting budgets. More research into the second-best nature of invasive species policy is warranted. 5. Free trade agreements and political economy: Free trade agreements increase the volume of trade and limit the available tools to prevent species introductions. Free trade may lead to high rates of biodiversity loss throughout integrated economies. Free trade agreements, however, also focus trade to a smaller set of trading partners that are geographically close and that are likely to have similar existing species pools. Although the transport of species may increase, introduction of new species may be rare. In addition, estimating the magnitude of disguised protectionism through invasive species policy seems a worthwhile topic for empirical research. 6. Valuation: For many invasive species, developing a better understanding of the behavioral dimensions to valuing a delaying-the-inevitable invasion will be important. Bioeconomic models should also account for this delaying-the-inevitable framework for a more comprehensive cost-benefit analysis. In addition, more research exploring the value of ambiguity is needed because people see some invasive species as having both good and bad qualities, e.g., many people are fond of the invasive mute swans on the East Coast of the United States.



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DISCLOSURE STATEMENT The authors are not aware of any affiliations, memberships, funding, or financial holdings that might be perceived as affecting the objectivity of this review.

ACKNOWLEDGMENTS


The authors are grateful for the financial support of the Program of Research on the Economics of Invasive Species Management (PREISM), the Economic Research Service of the U.S. Department of Agriculture under Cooperative Agreement 43-3AEM-3-80080, and the National Science Foundation (DEB 02-13698). The authors also thank a reviewer for helpful comments. J.F.S. thanks the Norwegian University of Life Sciences for its support.

LITERATURE CITED

Considers the management of an existing invader (deterministic control) and the prevention of an imminent threat of invasion (probabilistic arrival), both in an optimal control framework. Basic theoretical and empirical models are considered.

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Trade model with a probabilistic introduction of species (based on imports, random variables in time between introductions) and a constant rate of successful establishment. Tariffs can increase total invasive damage in some cases by distorting home market prices, leading to a bigger home industry and therefore more potential damages from each successful invasion.

Model of risk-averse managers faced with decisions over prevention or control. Risk-averse managers prefer control because uncertainty of prevention success is relatively higher than for control success. This can lead to suboptimal prevention efforts and can result in a higher number of invasions and lower social welfare.

Invasive introduction is treated as an externality. When uncertainty of the probability of invasion exists, but damages are known, decisions may be suboptimal because they are based on the loss rather than on expected benefits.

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Uses a stochastic dynamic programming framework to better integrate economic considerations in invasive species risk assessment. Allows for the ex ante assessment of costs and benefits of prevention of invasion.

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Nishizawa E, Kurokawa T, Yabe M. 2006. Policies and resident’s willingness to pay for restoring the ecosystem damaged by alien fish in Lake Biwa, Japan. Environ. Sci. Policy 9:448–56 Nunes P, van den Bergh J. 2004. Can people value protection against invasive marine species? Evidence from a joint TE-CV survey in the Netherlands. Environ. Resour. Econ. 28:517–32 Off. Technol. Assess. (OTA). 1993. Harmful Non-Indigenous Species in the United States, OTAF-565. Washington, DC: U.S. Congr., GPO Olson L. 2006. The economics of terrestrial invasive species: a review of the literature. Agric. Resour. Econ. Rev. 35:178–94 Olson L, Roy S. 2002. The economics of invasive species management: the economics of controlling a stochastic biological invasion. Am. J. Agric. Econ. 84:1311–16 Olson L, Roy S. 2008. Controlling a biological invasion: a non-classical dynamic economic model. Econ. Theory 36:453–69 O’Neill C. 1997. Economic impact of zebra mussels: results from the 1995 National Zebra Mussel Information Clearinghouse Study. Great Lakes Res. Rev. 3:35–42 Perrings C, Williamson M, Barbier EB, Delfino D, Dalmazzone S, et al. 2002. Biological invasion risks and the public good: an economic perspective. Conserv. Ecol. 6:1 Peterson E, Orden D. 2008. Avocado pests and avocado trade. Am. J. Agric. Econ. 90:321–55 Pimentel D, Lach L, Zuniga R, Morrison D. 2000. Environmental and economic costs of nonindigenous species in the United States. BioScience 50:53–65 Pimentel D, Zuniga R, Morrison D. 2005. Update on the environmental and economic costs associated with alien-invasive species in the United States. Ecol. Econ. 52:273–88 Pindyck RS. 2000. Irreversibilities and the timing of environmental policy. Resour. Energy Econ. 22:233–59 Pindyck RS. 2002. Optimal timing problems in environmental economics. J. Econ. Dyn. Control. 26:1677–97 Poland TM, McCullough DG. 2006. Emerald ash borer: invasion of the urban forest and the threat to North America’s ash resource. J. For. 104:118–24 Potapov AB, Finnoff DC, Lewis MA. 2007. Optimal control of biological invasions in lake networks. Nat. Resour. Model. 20:351–79 Rosen S. 1988. The value of changes in life expectancy. J. Risk Uncertain. 1:285–304 Rosenzweig ML. 2001. The four questions: What does the introduction of exotic species do to diversity? Evol. Ecol. Res. 3:361–67 Sala OE, Chapin FS III, Armesto JJ, Berlow E, Bloomfield J, et al. 2000. Biodiversity scenarios for the year 2100. Science 287:1770–74 Saphores JD. 2004. Environmental uncertainty and the timing of environmental policy. Nat. Resour. Model. 17:163–90 Saphores JD, Carr P. 2000. Real options and the timing of implementation of emissions limits under ecological uncertainty. In Project Flexibility, Agency, and Competition: New Developments in the Theory and Application of Real Options, ed. MJ Brennan, L Trigeorgis, pp. 254–71. New York: Oxford Univ. Press Saphores JD, Shogren JF. 2005. Managing exotic pests under uncertainty: optimal control actions and bioeconomic investigations. Ecol. Econ. 52:327–39 Settle C, Crocker TD, Shogren JF. 2002. On the joint determination of biological and economic systems. Ecol. Econ. 42:301–11 Settle C, Shogren JF. 2004. Hyperbolic discounting and time inconsistency in a native-exotic conflict. Resour. Energy Econ. 26:255–74 Settle C, Shogren JF. 2006. Does integrating economic and biological systems matter for public policy? The case of Yellowstone Lake. B.E. J. Econ. Anal. Policy 6:1–46 Sharov AA, Liebhold AM. 1998a. Bioeconomics of managing the spread of exotic pest species with barrier zones. Ecol. Appl. 8:833–45 www.annualreviews.org


Applies stated and revealed preference methods to the valuation of damages in coastal areas of the Netherlands. A harmful algae bloom leads to a number of different service losses— control of the algae is cost-effective.

Eradication may be optimal for small, controlled invasions, even if marginal costs exceed marginal benefits. This is because the necessary comparison is between cost of eradication and the sum of damages contingent on expected expansion of the invasive population, which can be reduced to a function of the discount rate and the expected intrinsic growth rate.

A synthesis of invasive species research arguing that economics needs to be used as a primary tool in invasive species policy because the root of the problem is economic. Incentives and institutions that support susceptible parts of society are stressed.

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Sharov AA, Liebhold AM. 1998b. Model of slowing the spread of gypsy moth (Lepidoptera: Lymantriidae) with a barrier zone. Ecol. Appl. 8:1170–79 Shogren JF. 2000. Risk reductions strategies against the explosive invader. In The Economics of Biological Invasions, ed. C Perrings, M Williamson, S Dalmazzone, pp. 56–69. Northhampton, MA: Edward Elgar Sumner DA. 2003. Exotic Pests and Diseases: Biology and Economics for Biosecurity. Ames: Iowa State Press Trigeorgis L, ed. 1995. Real Options in Capital Investment: Models, Strategies, and Applications. Westport, CT: Praeger Tschirhart J. 2009. Integrated ecological-economic models. Annu. Rev. Resour. Econ. 1:381–409 Tu A, Beghin J, Gozlan E. 2008. Tariff escalation and invasive species damages. Ecol. Econ. 67:619–29 Turpie J. 2003. The existence value of biodiversity in South Africa: how interest, experience, knowledge, income and perceived level of threat influence local willingness to pay. Ecol. Econ. 46:199–216 van Marrewijk C, Stibora J, de Vaal A, Viaene JM. 1997. Producer services, comparative advantage, and international trade partners. J. Int. Econ. 42:195–220 Weisbrod BA. 1964. Collective-consumption services of individual-consumption goods. Q. J. Econ. 78:471–77 Wiens JA. 2001. The landscape concept of dispersal. In Dispersal, ed. J Clobert, E Danchin, AA Shondt, JD Nichols, pp. 96–109. New York: Oxford Univ. Press Wilen JE. 2007. Economics of spatial dynamic processes. Am. J. Agric. Econ. 89:1134–44 Williamson M, Fitter A. 1996. The varying success of invaders. Ecology 77:1661–66 Yue C, Hurley T, Andersen N. 2009. Do native and invasive labels affect consumer willingness to pay for plants? Evidence from experimental auctions. Selected Pap. Agric. Appl. Econ. Assoc. Annu. Meet., Milwaukee, WI, July 26–28 Zavaleta E. 2000. The economic value of controlling an invasive shrub. Ambio 29:462–67

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Annual Review of Resource Economics Volume 2, 2010

Contents


Prefatory On the Increasing Role of Economic Research in Management of Resources and Protection of the Environment William J. Baumol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Modeling Choices Under Economic and Health Risks Empirical Challenges for Risk Preferences and Production David R. Just, Sivalai V. Khantachavana, and Richard E. Just . . . . . . . . . . 13 Real Options in Resource Economics Esther W. Mezey and Jon M. Conrad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Economics of Health Risk Assessment Erik Lichtenberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Invasive Species and Endogenous Risk David Finnoff, Chris McIntosh, Jason F. Shogren, Charles Sims, and Travis Warziniack . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Managing Infectious Animal Disease Systems Richard D. Horan, Eli P. Fenichel, Christopher A. Wolf, and Benjamin M. Gramig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Antibiotic Effectiveness: New Challenges in Natural Resource Management Markus Herrmann and Ramanan Laxminarayan . . . . . . . . . . . . . . . . . . . 125 Measuring the Benefits of Economic and Environmental Amenities The Life Satisfaction Approach to Environmental Valuation Bruno S. Frey, Simon Luechinger, and Alois Stutzer . . . . . . . . . . . . . . . . . 139 The Benefit-Transfer Challenges Kevin J. Boyle, Nicolai V. Kuminoff, Christopher F. Parmeter, and Jaren C. Pope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

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Consumer Surplus with Apology: A Historical Perspective on Nonmarket Valuation and Recreation Demand H. Spencer Banzhaf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 What Have We Learned from 20 Years of Stated Preference Research in Less-Developed Countries? Dale Whittington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Providing Safe Water: Evidence from Randomized Evaluations Amrita Ahuja, Michael Kremer, Alix Peterson Zwane . . . . . . . . . . . . . . . 237


Climate Change and Global Resources Costs of Mitigating Climate Change in the United States Niven Winchester, Sergey Paltsev, Jennifer Morris, and John Reilly . . . . . 257 Innovation and Climate Policy David Popp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 Economic Incentives and Global Fisheries Sustainability Christopher Costello, John Lynham, Sarah E. Lester, and Steven D. Gaines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 Public Policy: The Environment and Agriculture Regulatory Environmental Federalism Bouwe R. Dijkstra and Per G. Fredriksson . . . . . . . . . . . . . . . . . . . . . . . 319 Product Differentiation and Quality in Food Markets: Industrial Organization Implications Tina L. Saitone and Richard J. Sexton . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 Agricultural Labor and Migration Policy J. Edward Taylor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 Errata An online log of corrections to Annual Review of Resource Economics articles may be found at http://resource.AnnualReviews.org

Contents

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