Market Economics - Memo

Latest news & views from market economics / June 2017

Congratulations Emirates Team New Zealand!! 
M.E has carried out a number of assessments of the economic impact, costs and benefits and return on investment related to funding ETNZ or hosting the America's Cup regatta over the years. The positive economic effects are significant and widespread.  There are definitely exciting times ahead!  

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Water Battles - MOOoove over 

Protecting Landscape Values in the Mackenzie Basin

One battle is over, the landscape values of iconic Mackenzie Basin will be saved! - or at least better protected. After ten years of legal wrangling, the final episode of the battle over the protection of the world renowned outstanding natural landscape in the Mackenzie District has concluded.

Earlier this year the Environment Court upheld Mackenzie District Council’s policy (Plan Change 13), which will afford protection to the Basin from additional ‘greening’ associated with new irrigation of farmlands, primarily for dairy farming. Immediately, the farming interests in the area lodged an appeal to the High Court, which has subsequently been withdrawn. So the battle is over (for now), and the Environment Court decision may create precedent for future policies across the country.

M.E was a key part of the team that supported the Council’s policy in the final Environment Court hearing. Dr Douglas Fairgray provided economic evidence on the farming, tourism and non-market values associated with Plan Change 13, working closely with Rodney Yeoman. The Environment Court Judge Jackson drew heavily on Dr Fairgray’s economic evidence as pivotal justification for upholding the Council’s policy.  

Protection of the Mackenzie Basin - Plan Change 13

For those who have not had the joy of visiting the Mackenzie District, it is important to understand that much of the District lies within the large Mackenzie Basin, and area which provides fantastic vistas, of snow-capped mountains and vast tracts of tussock-clad hills and plains. The bulk of the Basin is sparsely populated, with high country sheep farming being the predominant farming activity. The whole of the Basin is recognised as an outstanding natural landscape (ONL).

The relatively unspoilt natural beauty of the District has resulted in the area becoming a hot spot for both domestic and international tourists. Importantly, the tourism sector has overtaken farming as the largest employer in the District. Tourism is expected to continue growing rapidly in the future and is likely to continue being the biggest sector in the District economy.

Also, over recent times the national dairy boom has moved into the District, resulting in a number of farms in the Mackenzie Basin being developed for irrigation, primarily to grow grass for dairy cattle. The irrigation of the land has caused a ‘greening’ of the landscape, which has changed the character of the Basin. A growing number of lifestyle blocks and holiday homes being developed in the area has also impacted the character of the Basin. 

In response to the changing character of the Basin, the Council developed Plan Change 13. PC13 sought to provide greater protection of the ecological and landscape values of the Basin from inappropriate subdivision, development and use. The Council has been fighting a protracted battle with land holders to gain final approval of PC13, which has been subject to 11 court decisions over a decade. 

M.E was brought into the Council team of experts in 2016 to provide economic evidence for the final Environment Court hearing. Up until this point, the Council had not commissioned economic research of PC13. 

The economic issue associated with PC13 is common to many policies, whether local or national, which is that the benefits and costs associated with government policy do not accrue evenly across society. We consider that the RMA is recognised as having an inherently “economic” basis, in that decision-makers must take into account the positive and adverse effects arising from provisions or actions, in relation to economic, social and cultural well-beings of people and communities, and the biophysical environment. Welfare economics, with its focus on the benefits and costs to society of alternative courses of action, is conceptually well aligned with the purpose of the Act. 

In the Mackenzie Basin case, the majority of the direct costs associated with PC13 accrue to land holders (mainly farmers) as opportunity cost of foregone farming output, while the benefits mainly flow to tourism operators and the wider District community, and especially to the national community from the protection of a major ONL and vulnerable natural environment. The quantification of the value of these benefits and costs, as well as how they are distributed in the community was the focus of M.E’s research and Dr Fairgray’s evidence before the court.

Market Failure and Planning

Planning regulations such as PC13 are a core mechanism for achieving outcomes which are sought by nations and communities but which will not be delivered through the operation of “monetisable” markets [1]  – commonly termed situations of ‘market failure’. 

In economic theory, a market failure can occur when there are benefits and costs that accrue to those who are not directly involved in market transactions. These benefits and costs are referred to as ‘externalities’, and can accrue to others in the community who have no direct influence over the operation of that monetisable market. These externalities occur quite commonly, and arise because there are no structures which fully link benefits and costs through money transactions to those who receive or generate them. This is particularly the case in regard to public goods, such as landscape values.

“The production of landscape falls under the rubric of market failure [2]. In essence the public cannot easily transact to satisfy a demand for landscape as a good. In the absence of a demand backed by a willingness to pay, land owners, predominantly but not exclusively farmers, may not be motivated to provide the features that might match demand. This is because landscape is a public good and they cannot capture benefits from all forms of users. Accordingly, and provided landscape is valuable to the public, there is a rationale for government intervention to stimulate the supply of features that are deemed to be in the public interest.” [3]

Generally, when there are externalities associated with a market the resulting outcome can be sub-optimal [4] with the monetisable market selecting to provide too little or too much of the item in question. The application of (planning) regulations can shift this component of the wider market towards the optimal outcome for society. 

In the case of land use for farming (and other) purposes, a range of externalities commonly exist. In the Mackenzie Basin, farming activity has the potential to affect the landscape values and environmental quality of the Basin. The issue at hand was how best to achieve the objectives of PC13, given there is potential for direct conflict between those objectives – that is, to enable pastoral farming on land in the Mackenzie Basin, and at the same time to provide adequate protection of the landscape values and environmental quality. 

The conflict arises because some effects from pastoral farming, especially those from intensification based on irrigation, will be detrimental to the landscape values and environmental quality. However, these adverse effects may not automatically ensue from intensification. There may be circumstances where intensification can occur without generating adverse effects on landscape values and environmental quality. 

From a societal perspective, the optimal outcome would arise where the benefits of additional farming activity can be maximised, but provided that the adverse effects on landscape values and environmental quality are at a level acceptable to society.

In the research and evidence preparation M.E measured the costs (foregone farm production and consenting costs) and the benefits (value of tourism and opportunity cost of irrigation water). Given the limited resources of the Council and the late stage at which M.E was engaged we did not undertake an economic valuation of the landscape. However we argued strongly that the non-market values are important, also that these externalities should and can be valued using economic methods. 

Dr Fairgray’s evidence showed that PC13 would produce a net positive benefit to the community, both locally and nationally. This was primarily because the PC13 mechanism would enable irrigation and associated intensification in those locations where it would not have a negative effect on landscape values, or the sensitive natural environment. The consenting process would ensure that the process would occur at the individual farm level, so that each situation could be evaluated on its merits. 

Judge Jackson quoted large sections of Dr Fairgray’s evidence, finding that the economic assessment was “convincing”. Also of importance was the Court’s findings that the economic valuation of externalities “would be useful if made”, further more he disagreed with the farming lobby economists that externalities should not be considered within an economic assessment. Finally, Judge Jackson considered that “ultimately this case comes down to the court having to weigh” the benefits and costs of “no Plan Change 13” against “Plan Change 13”

The Court’s decision is very encouraging, and has reaffirmed our view that decisions on planning and policy should be based on robust economic evidence. Moreover, that economic assessment should not be limited to market values. Specifically, that the Court considers that it would be useful if economic methods were applied to non-market values, i.e. externalities such as environmental and cultural can be considered by economists. 

Summary

The protection of Mackenzie Basin is a great win for our society. It is also a win for the M.E team going forward, as the decision has reaffirmed our view that policy and planning can and should be supported and improved with robust economic research. 

We may even suggest that councils can minimise unnecessary delays and cost (almost 10 years and over $1million in this case!) by commissioning early advice on economic matters. 

It is our view that policy and planning is an important tool for society to reach positive outcomes, which commercial markets left to themselves will never achieve. We also consider that economic methods should be extended beyond market values, to include non-market values that society values.

The general concepts drawn on and applied by the M.E team for the Mackenzie Basin case are applicable to most planning and policy. Warming to that theme, our next M.emo will focus on the recent hearing into the Rena Wreck case, for which we were able to apply similar concepts to consider effects on cultural values. 


For further information or comment on this article, please contact Rodney Yeoman (rodney@me.co.nz or 09 915 5525)

Footnotes:

[1] - This term is used to identify that component of the overall market in which benefits and costs are fully or predominantly captured through money transactions.

[2] -  If landscape value was perfectly capitalised in land prices then the market could be relied on to deliver an optimal allocation of landscape but markets do fail.

[3] - The Economic Valuation of Rural Landscapes, D Moran, Scottish Agricultural College, 2005.

[4] - In the case where a market has associated externalities, the resulting market outcome will be at a point where the marginal social benefit will not equal the marginal social cost (sub-optimal). The market outcome could be changed to produce additional gains to society.


   
 

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