THE ECONOMIC Significance

of LakeHopatcong

November 2008

NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION

DIVISION OF SCIENCE, RESEARCH & TECHNOLOGY

Bureau of Natural Resources Science

ACKNOWLEDGEMENTS

This study would not have been possible without the assistance of a number of colleagues in the New Jersey Department of Environmental Protection, including Steven Domber of the New Jersey Geological Survey, Patricia Rector of the Division of Watershed Management, and Annette Timmerman of the State Park Service. Their assistance is gratefully acknowledged.

This study was prepared by William Mates, Research Scientist 1, of the Bureau of Natural Resources Science (BNRS). The Bureau is part of the Division of Science, Research and Technology (DSRT) of the New Jersey Department of Environmental Protection. Gary Buchanan, Bureau Chief, reviewed the report in draft form and provided valuable comments.

Table of Contents

Page

Executive Summary4

General Approach6

Recreational Value8

Economic Activity Value11

Consumption Goods15

Ecosystem Services18

Property Values23

Non-Use Values26

Summary and Conclusions27

References31

Executive Summary

This report presents the results of a limited analysis of the economic significance of LakeHopatcong for the four municipalities that border the Lake: Jefferson and RoxburyTownships and Mount Arlington Borough, all in MorrisCounty, and Hopatcong Borough in SussexCounty. The report concludes that the economic benefits attributable to LakeHopatcong are large enough to make a solid case for these communities to invest in maintaining or increasing the Lake’s water quality.

Summary of Results

The results obtained in the study can be summarized as follows (all figures are in 2007 dollars):

Table 1: Summary of Findings (2007 $)
Component of
Total Economic Value / Annual value
$MM/yr / Present value
$MM*
Recreational value / $ 1.2 - 1.3 / $ 40 – 43
Econ. activity value (pvt. sector) / 2.7 / 90
Consumption goods value / 0.1 – 0.2 / 2 – 5
Water supply reserve value / 2.3 – 2.6 / 77 – 87
Property enhancement value / 2.1 – 6.9 / 71 – 230
Other ecoservice values / ? / ?
Non-use values / ? / ?
Total / $ 8.4 – 13.6 / $ 280 – 455

* based on discounting at 3% per year in perpetuity.

Note: columns may not add to totals due to rounding.

In more detail, the benefits found in the study are as follows:

  • The Lake and the adjacent HopatcongState Park provide at least $1.2-1.3 million/year in recreational benefits to visitors; the additional benefits attributable to near-by residents were not estimated due to a lack of necessary data.
  • The economic activity attributable to the Lake is estimated to be at least $2.7 million/year in terms of value added to New Jersey’s Gross State Product, the most widely used measure of economic output. Again, this estimate does not include Lake residents.
  • The Lake provides a minimum of $60,000-150,000 in consumption goods (mainly fish) annually; these figures are conservative because they represent a single fish species (trout) for which data were readily available.
  • The Lake serves as a supplemental water supply, and this “ecosystem service” is estimated to have an annual value of $2.3-2.6 million.
  • Proximity to the Lake is estimated to add $2.1-6.9 million/year to the value of lakefront homes.
  • The Lake also provides other ecosystem services and non-use values whose value could not be quantified for this study.

Because so many of the estimates are conservative due to lack of complete data, the “true” value of these benefits is undoubtedly much higher than the above estimates, and it seems reasonable to round the total annual value up to $9-15 million and the total present value up to $300-500 million.

Limitations of the Study

This study is subject to a number of limitations, including lack of certain relevant data, the existence of uncertainties in the correct values of certain physical and economic parameters, the need to adopt a local rather than a regional or statewide perspective, the constraint imposed by a static rather than a dynamic perspective, the assumption of stable economy-wide prices, the use of average rather than marginal parameter values, and others.

Despite these limitations, the study gives us a “ball-park” or order of magnitude estimate of the Lake’s contribution to the local communities at a point in time. That estimate is believed to be sufficiently well-supported to give us some confidence in using it as a basis for certain types of decisions faced by the Hopatcong communities, mainly those related to measures for maintaining or improving water quality.

As noted above, the figures cited in Table 1 most likely understate the Lake’s true economic value, since values have not been estimated for a number of benefits due to methodological or data limitations. However, even with these omissions, we can confidently state that the local communities derive substantial economic benefits from the Lake. The Lake is an irreplaceable asset that the towns cannot afford to lose through degradation of water quality, and its protection merits the attention and stewardship of local officials and residents.

General Approach

Definition of Economic Value

In estimating the Total Economic Value (TEV) of a natural asset such as LakeHopatcong, economists often use a classification scheme for benefits to ensure that all of the major types of benefits are included. The following scheme is probably the most widely used:

Table 2: Types of Economic Value
Use or Non-Use / Active or Passive / Specific Types / Examples
Use values / Direct or active / Non-consumptive / Boating
Consumptive / Fishing
Indirect or passive / Ecosystem services / Water supply; species habitat
Property values /

Home values

Other
Non-use values / (no breakdown / Existence value / Non-use values
at this level) / Option value / will be discussed
Bequest value / later in the report

Some studies of the economic value of natural assets such as lakes include amounts spent by owners of lakefront property on maintenance, repair and enhancement above and beyond what they would spend anyway. This study does not include this factor, on the basis that payments from homeowners to, e.g., contractors, are not bringing new dollars into the area and are already reflected in the area’s economic base; in fact, they can be seen as costs to the homeowners rather than benefits.[1] Similarly, tax revenues are not included as a benefit, since they represent transfers of funds from taxpayers to local or state governments and, as such, are already part of other benefits, e.g., the gross revenues of businesses that rent equipment to Lake visitors.

It is also important to note that some values involve the actual exchange of cash, while others do not. Table 3 shows some of the possibilities:

Table 3: Cash and Non-Cash Values
Activity / Cash Value / Non-Cash Value
Fishing / Amounts paid for equip-ment, bait, boat rentals, etc. / Anglers’ subjective enjoyment
of fishing as an activity
Water supply / Amounts actually paid for water / Implicit value of having a reserve source of drinking water
Existence value / Usually none, except donations for conservation / Public satisfaction from knowing that the Lake exists.

For the average person, cash may be what counts most in terms of any “economic” analysis, but for economists, non-cash benefits represent a fully legitimate type of economic value, even if the absence of cash payments makes it harder to estimate the magnitude of non-cash values. This report will present estimates of non-cash values where it is possible to do so.

Annual and Present Value Results

Economic values can be stated as annual flows or streams of benefits (or costs) and/or as the present values of stocks of economic assets (or liabilities). The former can be thought of as the entries on an income or cash flow statement and the latter as those on a balance sheet.

The present value of a given income stream over a defined period of time is the amount of money needed now to generate that stream of dollars at a given interest rate over that period. For example, if we want to receive investment income of $1,000 per year over the next 7 years, and if we have an opportunity to invest at an annual rate of 4%, we can determine the amount $X that we would need to invest now to produce that income stream. In this case, $X is the present value of the annual income stream of $1,000 calculated at 4% over 7 years; the amount works out to be $6,000.[2]

We can also perform the calculations in the other direction, in which case the best analogy would be a home mortgage, where we know the principal amount, the interest rate (for a fixed rate mortgage), and the term (for a fully amortizing mortgage), and we want to find the monthly payment (excluding payments to tax and insurance escrows). The main results of this study will be presented both as annual flows of value and as the present value equivalents of those flows.

The calculations involved in converting annual flows to present values and vice versa depend entirely on the assumed interest rate and time horizon. For example, the value of the Lake economy includes both annual spending by visitors and a one-time differential in the price of lakefront homes. In comparing or adding the two, how many years of visitor spending should we assume—10? 30? 100? Similarly, what interest rate should we assume—3%? 7%? 10%? Economics can tell us how to do the calculations, but it cannot generally tell us what time horizons and interest rates to use.

For that reason, this report will show all results in 2007 dollars based on discounting or amortization at a rate of 3%/year in perpetuity. The 3% rate is commonly used in studies of this type, and the use of perpetuity rather than an arbitrary time horizon emphasizes the value of the Lake if sustainably managed over an indefinitely long time horizon.

Based on the above approach, the succeeding sections of this report present the analyses and conclusions relating to the types of economic value outlined in Tables 2-3.

Direct Uses: Recreational Value

The most obvious economic benefits provided by Lake Hopatcong are the recreational opportunities it offers to visitors and local residents, including boating, swimming, fishing, winter sports, etc.[3] The basic measure of these benefits is the value of these services to the individuals themselves.

The generally accepted measure of such direct use value is the willingness of actual or prospective users to pay for the opportunity to enjoy a site’s recreational “services”, i.e., the maximum amount that they would be willing to pay for the opportunity to enjoy those services (Freeman 2003). In many cases, this amount (their willingness to pay or WTP) will exceed the amount that users actually pay. For example, a user might be willing to pay up to $10 if required for the right to visit a particular park, but the actual admission charge might only be $6. Economists call the difference “consumer surplus”. Whether consumer surplus is important for the Lake and how it might be measured will be discussed below.

The most obvious way to quantify users’ WTP for the Lake would seem to be the revenues from admission charges for visitors to HopatcongState Park. The Park charges $6/vehicle on weekdays and $10/vehicle on weekends for drive-ins and $3 for those who walk-in or bicycle.[4] Since vehicles usually contain more than one person, it seems likely that these minimal fees do not represent the total WTP of visitors to the Park. Put differently, it seems plausible that most visitors would be willing to pay, for example, another dollar or two to use the Park’s facilities.[5] By understating users’ total WTP, entry fees thus understate the total recreational value of the Park, and the understatement could be quite large. Put another way, users of the Park in the aggregate are realizing a very substantial but unquantified consumer surplus.

Under these circumstances, one conventional way of estimating that consumer surplus or, equivalently, of estimating total WTP, would be a “revealed preference” method such as contingent valuation. The contingent value (CV) method essentially involves use of a carefully constructed survey (analogous to a market survey or public opinion poll) to elicit expressions of WTP under various hypothetical circumstances from actual or potential consumers, in this case visitors to the Park. For example, actual and potential visitors might be asked whether they would be willing to visit the Park if the entry fee were increased to a given hypothetical level. The technique may sound simple and subject to manipulation[6], but well-designed CV surveys contain numerous safeguards to detect responses that do not in fact represent users’ true WTP.

While the results of a CV survey could be considered hypothetical, economists who design and conduct such surveys defend them as having as much validity as market or consumer research and public opinion polling, each of which is widely used in business, advertising, and electoral politics by firms and candidates who presumably think the results are worth something since they are willing to pay large sums to the survey firms. Nonetheless, skeptics continue to criticize CV as offering only expressions of opinion not backed by actual economic behavior. Moreover, a good CV survey takes time and skill to design and conduct and carries a substantial price tag. As far as is known, no CV study has ever been conducted for the Park or the Lake.

Travel Cost Method

Another frequently used method for estimating the total WTP of visitors to recreational facilities is the “travel cost” (TC) method.[7] In economic theory, the value of recreational services to a visitor is the visitor’s willingness to pay (WTP) for the services; the aggregate value for all visitors is then the sum of the individual WTPs. WTP in turn is based on the demand for recreational services (at the individual or aggregate level). Models for estimating recreational demand are based on the fact that visiting a recreational site involves an implicit transaction in which the visitor incurs various costs (see below) in return for the value or “utility” he or she experiences during the visit. Assuming that the value of the visit to the visitor is at least equal to the costs incurred, the total cost represents the implicit price of the visit to the visitor and hence provides at least a “lower bound” for the value of the visit.

The costs incurred in visiting recreational sites include the value of the time spent traveling to the site and back, the value of the time spent at the site, the admission fee (if any), and any cash travel costs, e.g., tolls and gas. Travel and visit times are normally the largest components of the visitor’s total cost. Since no one has unlimited time, time has an implicit “scarcity value”. Traveling to and from a recreational site and visiting it take time away from other potential activities, i.e., they reduce the visitor’s opportunities to engage in other activities. Travel and visit times therefore represent “opportunity costs” to the visitor. Since spending time on travel and visiting involves no explicit cash outlay for the time itself, the question is how to assign a value (in economic terms a “shadow price”) to that time.

Most empirical models of recreational demand take the relevant wage rate (or a percentage thereof) as the basis for measuring the opportunity cost of travel and visit time. In the simplest case, if a visitor has the opportunity of working additional hours at his or her usual wages, the value of the visitor’s time equals 100% of the wage rate, since visiting a recreational site entails giving up an opportunity to earn additional income. The assumption made by economists is that the value of the visit to the visitor must at least equal the wage rate, or else the visitor would forego the visit to engage in additional hours of paid work.

Since not everyone has the opportunity to work additional hours for pay, for a large number of individuals the average value of recreational time will usually be less than 100% of the wage rate.[8] Economists have developed a variety of techniques for obtaining empirical estimates of this parameter; the techniques involve complex analytic procedures and survey data and are described in Freeman (2003), chapter 13.

A full study using the Travel Cost Method (TCM) requires that information be available on the amount of time that visitors spend traveling to specific facilities, the amount of time they spend at those facilities, and several other factors; such information is often collected through a visitor survey. While the information needed for a complete TCM analysis of recreational value is not available for the Park, it is possible to use results from other locations to obtain an estimate of the value to visitors of their trips to the Park. Table 4 summarizes a number of such studies, as well as a multi-site CV study for comparison. The values are expressed as dollars per acre per year, which is a frequently used metric in this type of study.

Table 4: Recreational Values from Selected LakeStudies (2004 $)
Study & Yr. Publ. / Study Location / Method / Low Est. / High Est. / Average
dollars per acre per year
Shafer, E. L. 1993 / Spring Cr., PA / Travel cost / $938 / $938 / $938
Ward, F. A. 1996 / SacramentoCA / Travel cost / 17 / 1,635 / 826
Cordell, H. K. 1993 / Chatuge Lk, NC / Conting. val. / 326 / 1,210 / 768
Shafer, E. L. 1993 / Fisherman's Paradise PA / Travel cost / 470 / 470 / 470
Cordell, H. K. 1993 / Santeetlah Lk, NC / Conting. val. / 241 / 682 / 462
Cordell, H. K. 1993 / Fontana Lk, NC / Conting. val. / 162 / 679 / 420
Burt, O. R. 1971 / 3 lakes in MO / Travel cost / 393 / 393 / 393
Piper, S. 1997 / Black Hills, SD/Wyo. / Travel cost / 205 / 205 / 205
Cordell, H. K. 1993 / Hiwassee Lk, NC / Conting. val. / 115 / 242 / 179
Kreutzwiser, R. 1981 / Long Pt. Marsh/Lk EriePA / Travel cost / 154 / 154 / 154
Shafer, E. L. 1993 / Middle Cr., PA / Travel cost / 83 / 83 / 83

The average of the averages for these eleven sets of results is $445/acre/year, and the median of the averages is $420/ac/yr (both figures in 2004 dollars), or about $461 and $488 in 2007 dollars, respectively. Since the area of the Lake is 2,686 acres, the implied total recreational value in 2007 dollars is about $1.2-1.3 million per year. It should be noted that this amount greatly exceeds the actual entry fees visitors pay. In other words, the Park’s recreational value to visitors is much greater than their actual out-of-pocket payments for entry fees, with the difference representing consumer surplus (see above).