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Chapter 17 Economics of Outdoor RecreationPowerPoint Presentation

Chapter 17 Economics of Outdoor Recreation

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Economics of Outdoor Recreation

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

- 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

1. The Demand for Outdoor Recreation

Figure 17-1, p.335

- 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

Efficient Visitation Rates

Figure 17-2, p.337

- 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)

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

Modeling a Tax (on a negative consumption externality)

$

tax = ‒MEB at QE

MSC

a

Amount of tax

b

MPB

MPBt

MSB = MPB + MEB

0

QE

QC

Q

ECO424-Ch7-slide 23

- 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

Percentage change in Qd

Price elasticity of demand

P1

=

P2

Percentage change in P

D

Q

Q1

Q2

15%

= 1.5

10%

0

Pricing and Total RevenueExample:

P rises by 10%

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.

Q falls by 15%

Rule of thumb: The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity.

Greg Mankiw’s Microeconomics--

CHAPTER 5 ELASTICITY AND ITS APPLICATION

Price elasticity of demand

=

=

% change in P

P

P1

P2

Q

D

Q1

Q2

0

“Inelastic demand”< 10%

< 1

10%

D curve:

relatively steep

P falls by 10%

Consumers’ price sensitivity:

relatively low

Elasticity:

< 1

Q rises less than 10%

Greg Mankiw’s Microeconomics--

CHAPTER 5 ELASTICITY AND ITS APPLICATION

Price elasticity of demand

=

=

% change in P

P

P1

D

P2

Q

Q1

Q2

0

“Unit elastic demand”10%

= 1

10%

D curve:

intermediate slope

Consumers’ price sensitivity:

P falls by 10%

intermediate

Elasticity:

1

Q rises by 10%

Greg Mankiw’s Microeconomics--

CHAPTER 5 ELASTICITY AND ITS APPLICATION

Price elasticity of demand

=

=

% change in P

P

P1

D

P2

Q

Q1

Q2

0

“Elastic demand”> 10%

> 1

10%

D curve:

relatively flat

Consumers’ price sensitivity:

P falls by 10%

relatively high

Elasticity:

> 1

Q rises more than 10%

Greg Mankiw’s Microeconomics--

CHAPTER 5 ELASTICITY AND ITS APPLICATION

Price elasticity of demand

=

Percentage change in P

0

- 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

Greg Mankiw’s Microeconomics--

CHAPTER 5 ELASTICITY AND ITS APPLICATION

Price elasticity of demand

=

Percentage change in P

0

- 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

Greg Mankiw’s Microeconomics--

CHAPTER 5 ELASTICITY AND ITS APPLICATION

Differential Pricing

Figure 17-6, p.345

- 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

- 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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