The Economics and Social Benefits

of NOAA Data and Products

Economics at NOAA

Glossary
Concepts/Tools
Valuation
Cost Analysis
Joint Benefits/Costs
Need for Social Science?

Glossary Terms

Themes

NOAA Missions Goals: Climate, Ecosystems, Weather & Water, Commerce & Transportation

Sections

Topic Overviews: Topical narratives on the value of NOAA data & products to society
Economic Benefits: Research on the economic benefits of / cost mitigation by NOAA data & products
Economic Costs: Research on the economic costs / impacts of environmental extreme events
Data Applications: Real world accounts on the use NOAA data/products in decision-making
Data & Products: Select NOAA data & products (by topic)

Economic Concepts and Tools

Utility: A subjective measure of the satisfaction derived from consumption of a good or service or presence of a condition (such as an attractive environment).
Public Good: A good that cannot be charged for in relation to use (like the view of a park or survival of a species), so there is no incentive to produce or maintain the good. A public good can be used by many people without being used up and is available at no or negligible additional cost as the number of users increases. Public goods, by their nature are typically provided by governments and sometimes by philanthropy or protected by regulation.
Opportunity Cost: The value of the use of resources in an alternative way that is not obtained when the resources are used in the current way.
Average vs. Marginal Cost: Average Cost is the cost per unit of output (an output can be information or a service rather than just a physical product).Marginal Cost is the additional cost of producing and additional unit of output.
Economies of Scope and Scale: Economies of scope are changes in unit cost associated with changing the number of products of attributes.Economies of scale are changes in unit cost associated with increasing the number of units produced. Can apply to the size of an industry or region as well.
Joint Production: Production of two or more products simultaneously using some of the same resources. Allocation of costs is ambiguous when joint production occurs, and rules of thumb are often used.
Externalities: Changes in costs or benefits to one person or sector resulting from changes in conditions in another.
Network Externalities/Economies: Efficiencies arising from the participation of individuals or organizations in a network. (Diseconomies could arise, for example, with congestion costs.)
Induced Innovation: Innovation that comes in response to economic incentives. Incentives can take the form of higher costs that lead to the search for savings though development of technology or improved organization, growing markets that increase the rate of return to investments in innovations that make it possible to serve those markets, reductions in the costs of technology that encourage their use, regulations that create interest in meeting requirements in less onerous ways, etc.
Elasticity: The percentage change in one variable for each one percent change in another variable to which it responds. For example, the price elasticity of demand is the percentage change in demand associated with a one percent change in price.
Value of Time: The resource value of the use of people's time in carrying out an activity. Activities that are not paid for but require time such as traveling or participating in regulatory processes can be valued in relation to the wages that could have been earned or the utility (opportunity cost) that could have been obtained by engaging in another activity.
Time Preference/Time Value of Money: The amount of money a person has to be paid to forego income today in favor of receiving income at a later date. This is a measure of individual or organizational preference. Generally it is valued by an interest rate that could be earned on the money while waiting. The concept is used in investment analysis, including in valuing investments in infrastructure and in a better environment.
Human Capital: The stock of ability and knowledge that reflects the accumulated value of information and all forms of education.
"All other things being equal": Changes that would have been observed if no other changes occurred at the same time. The concept is used to indicate isolation of influences of particular actions or developments that are of interest. There also can, of course, be interaction effects that occur because other changes have taken place.

Valuation

Valuation takes into account both present and future effects, allowing for a promise of a dollar to be received later being worth less than a dollar received today (discounting).

Valuation is based on…

What people or organizations pay
- Observed prices
- Payment by people with differing strengths of demand (consumer surplus)
Willingness to pay as gauged by surveys
- Direct questions
- Willingness to pay for particular attributes (timeliness, convenience, etc)

Value of activities or products the product contributes to…

Value of time in shopping and using a product (lost use of the time in other pursuits such as working).Value of health and life as gauged by loss of earnings, medical costs and what people have to be paid to take dangerous jobs.Contribution to the output or productivity of a consuming organization or system.
Utility derived by the public, i.e. for a public good that is not used up and has a very low additional cost of being available to many more users. Utility of a public good sometimes can be gauged by loss of an alternative use (e.g. not selling park land or not collecting taxes on its use).

Cost-Benefit and Cost-Effectiveness Analysis

Cost-benefit analysis relates cost to the value of the output or outcome while cost-effectiveness analysis relates cost to a measure of output or outcome.

Cost-effectiveness is often used when valuation measures are not easily obtainable or differences over methods exist.

Applications

Uses of cost-benefit analysis:

Justifying program expenditures
- Size if impacted sectors
- Benefits
- Benefits in relation to costs and/or effectiveness
Making choices among programs and deciding how much to spend or invest
- Choosing among programs for alternative goals or for the same goals
- Taking into account how payoff varies with scale
- Determining contributions of complementary inputs or programs
Designing programs
- Features of products, target users and uses and distribution systems
Defining public/privates sector roles

Cost-benefit and cost-effectiveness analyses provide an information system that illuminates and informs the decision-making process. They offer a framework for organizing thoughts, listing the pros and cons of alternatives, and determining values for all relevant factors so that the alternatives can be ranked.

They are not a mechanical process that determines policy or action, substituting for a political or other process that can take other considerations into account.

Integrating Analyses and Presenting Results

Cost-benefit analysis can serve as a method of integrating many kinds of analysis and a form of presentation, making use of:

Benefits based on:
- Demand and market penetration
- Adaptation to information
- Who uses and who benefits
- Valuation of information
Costs based on:
- Technology
- Competition; contract and employee incentives
- Economies of scale, scope, learning or network
What is a cost vs. a benefit depends on to whom?

Cost-Benefit Elements

Market benefits:
- Short term vs. long term benefits
- Direct and indirect benefits
- System effects
Non-market benefits:
- Public goods
  - Difficult to exclude users who do not pay
  - Product can be provided to additional users at essentially zero incremental cost
Valuation of benefits can include:
- Value of information
- Value of reducing uncertainty
- Value of people's time
- Value in conjunction with other inputs or products
Cost:
- Marginal (incremental) vs. average costs
- Direct and indirect costs
- Non-market costs

Dealing with Joint Benefits, Costs of Multiple Inputs or Products

Some programs use inputs from several sources and/or produce outputs only in combination (e.g. data and forecasts). In these circumstances it is necessary to allocate the benefits and costs among programs for the individual program performances to be assessed.

The techniques available to allocate benefits and costs among programs yield only approximations. Sometimes a simple rule of thumb like allocating benefits in proportion to costs can be used, especially if the result is to be added to information on other programs that are part of a set of activities. However, caution must be used in basing decisions on the assumptions that crude allocations require.

Techniques

Benefits…
- Multiple Inputs
  - First determine the combined benefits.
  - If possible, estimate incremental benefits for each of the inputs.
  - Allocate total benefits based on the relative sizes of the incremental benefits of each input.
  - Alternatively, use a rule of thumb based on a historical allocation or allocations in other circumstances or rely on negotiation.
- Multiple Outputs
  - First determine the combined benefits.
  - If possible, estimate incremental benefits for each of the outputs.
  - Allocate total benefits based on the relative sizes of the incremental benefits of each output.
  - Alternatively, use a rule of thumb based on a historical allocation or allocations in other circumstances or rely on negotiation.
Costs…
- Multiple Inputs
  - First determine the combined costs.
  - If possible, estimate incremental costs for each of the inputs.
  - Allocate total benefits based on the relative sizes of the incremental costs of each input.
  - Alternatively, use a rule of thumb based on a historical allocation or allocations in other circumstances or rely on negotiation.
- Multiple Outputs
  - First determine the combined costs.
  - If possible, estimate incremental costs for each of the outputs.
  - Allocate total benefits based on the relative sizes of the incremental costs of each output.
  - Alternatively, use a rule of thumb based on a historical allocation or allocations in other circumstances or rely on negotiation.

Why does NOAA need Social Science?

Society depends upon NOAA for the products, services, and information we deliver. We recognize our responsibility to ensure that society receives and understands the information it needs. People can only use what NOAA provides, however, if they recognize how we connect with them and how they can apply our information to their benefit. Similarly, we must remain aware of society's needs.

We must analyze and understand current and emerging user requirements, priorities, and benefits of our information, services, and products. This requires a strong economic and social science capability working across interdisciplinary lines. By strengthening our program planning and justification, decision-making, and performance measures, we can improve effectiveness and the value of our programs to society..

Our goal is to use sound cost-benefit analyses, risk assessments, and economic and social impact analyses as we invest in new systems and facilities, develop products and services, plan research, and manage natural resources.

The Social Science Initiative at NOAA

Creation

In the spring of 2003, the NOAA Research Council and its Social Science Panel recommended increased and more systematic use of social science in planning and decision-making. The recommendations have been strongly endorsed by NOAA management and incorporated in program guidance, guidance on program integration and the NOAA research plan, and the 2005-2010 NOAA Strategic Plan.

Evolution

During the three years since the reports of the NOAA Research Council and its Social Science Panel there has been a growing recognition of the importance of social science in NOAA's planning and decision-making. Staff capabilities have increased coordination mechanisms have begun to evolve. Estimates of the value of NOAA's products and services have been brought together and made more complete, social scientists have interacted more frequently, projects have been inventoried and information on analyses, data and methods has been more widely shared. Social science plans are being developed by NMFS, NOS and climate services. Budget submissions have started to incorporate social science research plans and social science-based performance measures. During this period NOAA has placed increasing emphasis on providing products and services and on understanding the users, uses and markets for those products.

Realization

NOAA is now implementing an agency-wide social science research program. Objectives include demonstrating the benefits of NOAA programs, such as links between research and product delivery, understanding our user base, analyzing unique natural resource management and regulation issues, and developing techniques and databases. Dimensions of this effort include increasing cooperation among NOAA units in research and data collection, appropriately integrating contributions from multiple social sciences, taking into account the interdependencies of physical, biological, and social sciences, and integrating social science research into NOAA planning and budgeting processes to facilitate use of social science in decision-making.

Key Social Science Questions

For Information Provision Missions

Who are the current and potential users of the information?
What attributes of the information are important (scale, timing, accuracy, etc.)?
How do people and organizations respond to the information?
What are the implications of weather, climate, and ecological forecasts for sectors of the economy and their relative value by sector?
What is the best way to package and transmit information so that it can be most easily understood and used by constituents?
What are the benefits of improving the existing attributes of the information?
For extreme events such as weather or high levels of variability in fish populations, what advanced planning can reduce uncertainty and expected damages?

For Regulation and Management

What cultural, social, and economic factors determine the behavior of users of marine and coastal resources?
What is the value of market and non-market goods and services?
What effects will changes in user behavior have on the value and distribution of goods and services generated as well as on the resources, employment levels, value of output, costs of enforcement, etc.?
How does user behavior affect resources and what are the direct and indirect interrelationships between different users and different resources?
What behavioral and institutional changes achieve desired improvements in the status of the resources?

Social Science Applications

Effective Surveys

Determining the appropriateness of surveys vs. other approaches to obtaining information for particular purposes (e.g. interviews, focus groups, secondary data, etc.)
Deciding what type of survey to conduct (how structured, how detailed, where administered, how often and whether repeated with the same people, etc.)
Defining survey populations
Developing sampling procedures
Designing survey instruments
Developing and wording questions
Training interviewers
Analyzing responses
- Transforming data
- Examining non-responses to survey and individual questions and other possible sources of bias
- Analyzing data and distilling results
- Interpreting findings in relation to initial expectations or theories, other surveys and data, interpretations of other studies, actual behavior of respondents, etc.
Communicating objectives, procedures and conclusions
Learning from the experience for future surveys

Performance Measures

Using concepts in determining what measures to use and how to define them
Understanding how people and organizations may respond to programs in order to know what kinds of effects to look for
Using concepts and research to identify in which settings impacts may occur so steps can be taken to obtain measures from those settings
Using survey and other methods to collect and interpret data on performance
Understanding perceptions of changes that may influence how information is reported
Developing predictions of outcomes in the absence of programs that can be compared with outcomes in the presence of programs
Using models to estimate effects of programs while holding other things constant
Understanding how programs may interact and how to deal with combined effects
Developing performance measures that are consistent with measures of valuation and cost