Originally prepared for the "Social Order and the Endangered Species Act" Conference at the University of Wyoming.

The individuals who contributed time, effort, and data to this study are far too numerous to list here. A complete list can be found in the project reports Brookshire et al. (1993, 1994, 1995). We owe a special debt of gratitude to Mel Schamberger, Larry Shanks, Kristen Kingery, Reed Harris, Bob Williams, and Margot Zallen. The authors acknowledge the contributions of Michael McKee, University of New Mexico, who, although he declined to be an author, contributed extensively to the Regional Impact Modeling section.

The designation of critical habitat for endangered species involves reallocation of resources. This paper sets forth the methodology and results from two case studies that measured the economic impacts of designating critical habitat. The case studies vary in regional scope. The first study incorporates seven states along a 2200 mile stretch of the Colorado River and its major tributaries and focuses on six endangered fishes. A second study analyzes two endangered fishes in a two county study region in Utah and Nevada through which the Virgin River flows.

The methodology utilized in both case studies was to measure the impacts of designating critical habitat and involves the following steps: (1) determining how the biological needs of endangered fish will affect the allocation of resources among river users; (2) assessing the direct economic impacts of resource reallocations on river users; and (3) using a set of applied general equilibrium models of the affected region in order to capture all of the direct and indirect effects of resource reallocations.

Approaching the estimation of the impacts of designating critical habitat in this fashion insures that all actions taken on behalf of the endangered species will be captured in the analyses as reallocation of resources. This insures that impacts are inclusive of negative as well as positive effects that stem from the reallocation process.

The principle results of the two case studies are that sectoral impacts are both positive and negative. The sub-regional impacts for both case studies are not distributed evenly. The regional impacts, whether positive or negative, are small relative to a baseline level of economic activity representing no actions taken on behalf of the fishes. The national efficiency effects as determined in the Colorado study are effectively zero for the designation of critical habitat.

Introduction

Although the Act has no provisions for studying the economic consequences of listing threatened and endangered species, it does require the Service to assess the economic impacts of all proposed critical habitat designations. As a result, economists have been participating in the ongoing process of designating critical habitat for endangered species and assessing the economic impacts of such designations.

It has been argued that the process of listing a species as endangered or threatened has far greater economic consequences than subsequent critical habitat designations, an argument that has some merit with respect to the examples discussed in this paper. As a practical matter, however, most economic studies of critical habitat designations attempt to estimate the combined effects of both listing and critical habitat designations, and then allocate a proportion of effects to each administrative action.

It is almost axiomatic that setting aside critical habitat for endangered species involves a reallocation of resources. Threatened and endangered species are usually listed because the current allocation of resources has resulted in excessive habitat degradation. Such adverse modification of natural habitat is generally due to economic activity that has occurred as a result of human settlement and economic development. Resources are allocated to particular uses as a result, and stabilizing and/or reversing this development requires that these resources be allocated to other uses. For example, trees may not be harvested that provide habitat for birds, water may not be used for irrigation so that stream flows are returned to more historic levels, and land may not be developed for housing so that habitat for plant species is preserved. However, by not harvesting trees or building houses, recreational uses may be enhanced and setting aside minimum stream flows in one area may imply that more water is available for development elsewhere. Assessing the economic impacts of designating critical habitat thus requires a general equilibrium analysis to fully capture the range of potential activities created by the designation as well as the range of activities that are eliminated or reduced. In short, the reallocation will yield economic impacts that are benefits as well as costs.

This paper reports the methodology and results from a study that measured the economic impacts of designating critical habitat for four endangered fishes along a 2,200 mile stretch of the Colorado River and its major tributaries. A second case study covering two fishes and 160 miles of the Virgin River in Nevada and Utah is also discussed. The two case studies analyze the impacts of critical habitat designation on two regions greatly differing in size. For the Colorado study, designation affects all seven states in the Colorado river basin: Arizona; California; Colorado; Nevada; New Mexico; Utah; and Wyoming. The critical habitat analyzed in the Virgin study covers a river flowing through three counties in Arizona, Nevada, and Utah. In both cases, the study region was determined on the basis of habitat needs and direct economic impacts.

Two study regions differ considerably in the sizes of their economies. The output of the region in the Colorado study is approximately $1.3 trillion annually, compared to $28 billion for the Virgin study region. The Colorado study region constitutes a diversified economy that has experienced growth above the national average during the last several decades. The region of the Virgin study is currently one of the fastest growing areas in the United States, with continued high population growth rates projected for the time horizon of the study. The time horizons of the studies coincide with the time span of the proposed recovery plans for the species: 1995 to 2020 in the Colorado study; and 1995 to 2040 in the Virgin study. The major characteristics of the two studies are summarized in Table l.

To recover the endangered fishes in these two river systems, the river systems must be protected and/or altered to more closely represent the natural conditions that are believed to be biologically necessary for species survival. Alteration of biological conditions, through listing and the designation of critical habitat, will in turn restrict or alter human uses of the river systems and thus generate direct and indirect economic impacts. The methodology used in the Colorado River and Virgin River studies to measure such impacts involves the following steps:

1. determining how the biological needs of endangered fishes will affect the allocation of resources among river users;
2. assessing the direct economic impacts of resource reallocations on river users; and
3. using a general equilibrium model of the affected region to capture all of the direct and indirect effects of resource reallocations.

Approaching the estimation of critical habitat impacts in this fashion can avoid pitfalls that arise when the focus is on the losing sectors of a local economy. Perhaps the most publicized economic analysis of proposed critical habitat designations was that for the northern spotted owl (Schamberger et al. 1992). That analysis presented a thorough assessment of the impacts of critical habitat designations on the timber industry utilizing public forest resources in the Pacific Northwest, and at one time was designated as a "model for subsequent analysis" by the Service (ECO Northwest 1994). Yet the spotted owl study did not address some of the basic economic questions that arise when resources are reallocated, such as how the rate of timber harvesting on private lands and non-critical habitat lands would change in response to critical habitat designations on federal lands, or how labor resources formerly used to harvest lumber of public lands would be redeployed. The case studies described in this paper attempt to address issues such as these in the context of critical habitat designations for endangered fish.

From Biological Needs to Resource Reallocations

The administrative procedures of the Endangered Species Act prescribe certain steps in the evaluation of the economic impacts of critical habitat. These have been widely discussed elsewhere (see Rolf 1989; Berrens et al. 1997.).

The Colorado squawfish and the humpback chub were listed as endangered species on March 11, 1967 (32 Federal Register 4001), and thus were originally listed under the auspices of the Endangered Species Preservation Act of 1966. The razorback sucker was listed as endangered on October 23, 1991 (56 Federal Register 54957), the bonytail on April 23, 1980 (45 Federal Register 27713). The listing of the woundfin occurred on October 13, 1970 (35 Federal Register 16047), and the listing of the Virgin River chub on August 24, 1989 (54 Federal Register 35305).

Determination of critical habitat requires consideration of physical and biological features that are essential to species conservation. The critical habitat designated in both river basins was aimed at creating biological conditions that enhance the constituent elements for the target species. These features, referred to as constituent elements, include: (1) space for populations; (2) food, water, or other nutritional or physiological requirements; (3) cover or shelter; (4) sites for breeding, reproduction, and rearing of offspring; and (5) habitats that are protected from disturbance or are representative of the historical and ecological distribution of species.

In the Colorado River study, over 2,200 miles of the river and its tributaries were designated critical habitat to provide one or more of the constituent elements described above. These designations protect river flows deemed necessary for species survival and recovery as well as riparian areas in the flood plain that are used as backwater breeding areas during periods of high spring flows. The designations also effect how water is released from federal reservoirs along the river system. For example, all four Colorado River fishes require high spring flows for successful breeding and the survival of juvenile fish. Storage of peak flows in federal reservoirs for later release to downstream users could thus be considered an adverse modification of critical habitat in violation of the Endangered Species Act.

The practical effect of the designations on the reallocation of resources among other river users is a function of geography. A substantial amount of critical habitat was designated in the state of Colorado on the upper Colorado River and its tributaries, the Gunnison and Yampa Rivers. Along these river reaches, the practical effect of the designation is to limit further consumptive uses of waters that would reduce peak spring flows needed to provide breeding habitat for fish. These restrictions might inhibit or prevent the state of Colorado from proceeding with plans to divert more Colorado River water to front range communities for municipal and industrial uses. They may also restrict Wyoming's ability to develop and use water in the Little Snake River, a tributary of the Yampa. Water that would otherwise have been consumptively used in Colorado and Wyoming could instead be stored in Lake Powell and eventually released for use by lower basin states. Furthermore, in lieu of water from the Colorado River, municipal and industrial water users in Wyoming and Colorado may rely more heavily on purchases of agricultural water rights or increased agriculture effficiencies.

Critical habitat designated along the San Juan River in New Mexico, a major tributary to the Colorado, would also have negative impacts upon agricultural production. In this case, the existence of critical habitat could prevent the Navajo Tribe from implementing plans to expand the Navajo Irrigation Project near Farmington over the next two decades. As a result, water that would otherwise have been put to irrigation use in New Mexico will also flow into Lake Powell and eventually be released for use by lower basin states.

Substantial amounts of critical habitat were also designated along the lower Green River below Flaming Gorge Reservoir in Colorado and Utah and along the Colorado River between Lake Powell and Lake Mead. The practical effect of these designations will be to cause the U.S. Bureau of Reclamation to alter its operating plans for those reservoirs. Prior to listing and critical habitat designations, these reservoirs were operated primarily to maximize hydropower production subject to the restrictions of meeting downstream demands and maintaining flood control storage space. This operational regime resulted in relatively constant monthly releases with extreme diurnal fluctuations to provide peaking power for electricity consumers. To provide the constituent elements of critical habitat, however, both Glen Canyon and Flaming Gorge Dams are being reoperated to increase spring releases and decrease fall releases with fewer diurnal fluctuations to provide for breeding habitat for endangered fish. These new operating plans will, in turn, affect hydropower production and recreational uses of the river.

Other tributary reservoirs on the Gunnison and San Juan Rivers are also being reoperated to enhance habitat for endangered fish.

In the Virgin study area, water is being redirected from the currently dominant use, irrigated agriculture, to municipal and industrial uses in order to satisfy the demands of a rapidly growing population. The demands for the endangered fishes will compete with municipal and industrial demands for water currently used in agricultural production. The designation of critical habitat is not the primary cause of declining agricultural production in the area, but will accelerate the ongoing conversion from agricultural uses to other, predominantly municipal and industrial uses.

Estimating Direct Economic Impacts

The effects of critical habitat designations on water users below Flaming Gorge and Glen Canyon dams were modeled in two ways. First, a sample of outfitters providing rafting, fishing and other recreational services to the public was interviewed in person to assess their reactions to the flow changes needed to enhance spawning habitat for endangered fish. Each outfitter was shown visual hydrographs of average river flows by week, both before and after critical habitat designations, for reaches of the river where he operated. Each outfitter was then asked to identify periods of the year when his operations would be affected by the new operating regimes. In most cases, the outfitters were able to identify some negative impacts of the new operating regimes on their operations. These consisted primarily of an increased frequency of high-flow periods in the spring when river boating and rafting would be too dangerous and an increased frequency of low-flow periods in the late summer and fall when boating and rafting would be impractical. Outfitters would not be able to shift trips to other times of the season because of launch restrictions imposed by federal resource management agencies. Because the most likely substitute sources of similar recreational experiences are outside of the Colorado River basin, it was assumed that regional output in the recreation and tourism sectors of the economy would decline relative to pre-critical habitat conditions. Based upon the interview results the amount of the decline was estimated using Colorado River recreational usage and expenditure data assembled by federal agencies, adjusted to reflect the percentage of time that the river would have unusable recreation flows.

The second direct effect of new operating regimes was to limit the amount and timing of hydropower production. Estimates of the direct economic effects of this resource reallocation were developed by Stone and Webster Management, Inc., which has extensive experience modeling hydropower impacts for the Bureau of Reclamation. The results of the Stone and Webster study indicate that the new operating plans would result in the construction of an additional 121 megawatts of electrical generating capacity in the basin, a somewhat higher average market price for electricity, and somewhat lower consumption.

Estimates of direct impacts for critical habitat reaches on the lower Colorado River below Lake Mead involved both the recreational and agricultural sectors of the regional economy. Because Wyoming and Colorado will forego some future consumptive uses of Colorado River water to protect endangered fish, the state of California likely will be the net beneficiary of that foregone consumption. At present, none of the upper Colorado River basin states (Colorado, New Mexico, Utah, and Wyoming) utilize their full allotment of water under terms of the Colorado River Compact. This water is currently stored in Lake Powell until it is released for hydropower production or to create storage space for flood control purposes.

Historically, California has been the beneficiary of such releases because Arizona and Nevada (the other lower basin states) have not been able to fully utilize the additional water. Although that situation may change in the future, for this study it was assumed that California would continue to benefit from foregone upstream developments. The study originally assumed that all water consumption foregone in upper basin states would benefit California's economy. That assumption was later relaxed to allow some additional consumption by Nevada to serve the burgeoning need for municipal and industrial water in the Las Vegas area.

The benefit to California will be the inverse of the impact to Colorado's economy. Instead of increasing the rate of irrigation water rights transfers to municipal and industrial uses, critical habitat designations will allow California to experience a decrease in the rate of such transfers relative to baseline conditions. As a result, California will experience relatively higher output in its agricultural sectors compared with pre-critical habitat conditions. The amount of this increase was estimated using a similar approach and data sources were used to estimate the magnitude of agricultural output declines in Colorado and Wyoming. In addition, it was necessary to estimate river transit and reservoir evaporation losses in moving water from the upper to the lower basin. This information was provided by the Bureau of Reclamation.

The other direct economic impact that was quantified for the lower basin was a decrease in sport fishing activity at Lake Mead and Lake Mohave relative to pre-critical habitat conditions. This decrease would come about because state plans to enhance warm-water recreational fisheries in the two reservoirs may be restricted or prohibited because of potential negative impacts on endangered fishes. The magnitude of this effect was estimated using data on fishing activity and fishing expenditures supplied by state officials. Although there may be other direct impacts to the lower basin involving development restrictions in riparian areas, they were not quantified during this study.

For the Virgin River study, the direct physical impacts consisted primarily of flow changes (levels and timing) with some consideration given to water quality issues stemming largely from salinity levels. The resulting direct economic impacts fall largely on the agricultural sector. However, there is an additional category of impact that arises in this case. Several water delivery projects are planned for the next 45 years to cope with regional population growth. Critical habitat designations will necessitate that these projects be constructed earlier with a consequent increase in the cost of water delivery and this will have the effect of reducing household and firm budgets for other expenditures. Alternatively, conservation actions will be required which will also raise costs to water users in the form of additional investments in conservation actions.

Per capita water use in the St. George, UT area is considerably greater than in other southwest urban areas. Current use is 465 gallons per capita per day (gpcd). For the conservation scenario this was reduced to approximately 260 gpcd which is comparable to Phoenix and well above Tucson, AZ which has a use rate of 160 gpcd. Conservation requires expenditures which raises the effective cost of water and this was incorporated into the scenario.

The detailed accounts of the modeling are found in Brookshire, McKee, and Watts (1993), Brookshire, McKee, and Watts (1994), and Brookshire, McKee, and Schmidt (1995). This section draws upon and is taken in part from chapters 7, 8, and 15 (section K) of Brookshire et al. (1993) and was utilized in Brookshire et al. (1994, 1995).

The I-O and CGE analyses enable the determination of a variety of impact measures. Impacts are measured as changes in output. The two model classes measure impacts at three levels: the sub-regional level; the regional level; and the national level. Depending on the case study, the sub-regional level differs considerably in size. In the Colorado study individual states are the lowest level at which impacts are determined. For the Virgin River case study, the county is the sub-regional level, the regional level being a three county region.

CGE models offer several advantages over I-O models, but the central advantage is that CGE models admit factor substitution in production in response to changes in relative prices, while the conventional input-output model employs a fixed proportion (Leontief) production function. The usual production function employed in CGE models consists of a nested form involving either Cobb-Douglass/Leontief or Constant Elasticity of Substitution (CES)/Leontief forms. The intermediate inputs (outputs of the other sectors in the economy) enter the production function in fixed proportions with coefficients from a regional input-output table. The primary inputs (labor and capital along with land, energy, etc., if these are modeled) enter the top-level of the production function along with the composite input produced as intermediate goods. CGE models are, however, much more data-demanding than I-O models. Thus, only a single CGE model was constructed for the Colorado study and none for the Virgin study.

The I-O Model Structures

Defining I as the identity matrix, A the interindustry matrix, X the vector of outputs, and Y the vector of final demands, the I-O model equations can be represented as:

and the outputs necessary to satisfy intermediate and final demand may be solved for as:

where (I-A)^-1 is known as the Leontief inverse.

Given exogenous shocks to a local economy, changes in gross outputs required to satisfy changes in final demands and/or resource availability are determined. Through its multiplier impact analysis, the I-O model is capable of generating estimates of the changes in output of given commodities, changes in employment, and changes in income.

The primary database for the construction of the initial I-O models was the IMPLAN data. For the Colorado River study, the baseline matrices were constructed from 1982 databases. The Virgin River study utilized 1990 databases. The original 528 IMPLAN sectors were aggregated to 20 for the Colorado River study and 16 for the Virgin River study. This aggregation reduced the dimensionality of the analysis to manageable levels and enabled the sectors that were affected by direct impacts to be analyzed.

The IMPLAN modeling and database project were initially undertaken by the U.S. Forest Service to provide regional I-O modeling capability (see U.S. Department of Agriculture 1993). The database management and development and the software development are now conducted by the Minnesota IMPLAN Group (MIG). For these projects, the use of IMPLAN was confined to the construction of the input data sets to the I-0 models that were developed in the GAUSS programming language (see Brooke and Meeraus 1992).

Impacts on employment, wages, and taxes are also presented for the region and by sector in Brookshire et al. (1993, 1994, 1995).

Models constructed via the "Robinson" approach are typically solved using computer programs designed to solve large-scale systems of non-linear equations. The GAMS (General Algebraic Modeling System) software was adopted to solve the model of the seven-state region. This package offers considerable flexibility in the construction of the CGE model and in conducting simulation analyses. See Dervis, de Melo and Robinson (1982), Berck, Robinson, and Goldman (1991), and McKee et al. (1996) for a discussion of this class of CGE model.

The Social Accounts Matrix (SAM) provides a link between the National Income and Product Accounts (NIPA) data, and the input-output accounts data. As such, it serves as a cornerstone of the CGE models constructed using the Robinson method. The specific structure of the SAM is determined by the application at hand.

A 19 sector model was constructed with the benchmark data set for 1982. The outputs of the 19 sectors of the economy are produced with inputs of labor, capital, land (where applicable), and an intermediate good. The intermediate good is a composite commodity with the weights determined by the input-output coefficients from the baseline data set. The production function is defined as a constant returns Cobb-Douglas over the primary factors:

There are three households in the economy classified as High Income, Middle Income, and Low Income. [The baseline income levels are in 1982 dollars.] Income is earned through the sale of factors of production. Each household devotes income to the goods produced by the 19 sectors of the economy and to savings. Total consumption for each household class is given by:

In classical trade theory, for a small open economy (SOE) there is an assumption concerning prices of traded goods that is sometimes referred to as "the law of one price". Traded goods are assumed to be perfect substitutes independent of the geographic area of production, the implication being that prices are independent of region of production. Since regions are observed simultaneously importing and exporting the same "good," the law of one price is probably not an accurate reflection of price formation in the SOE. That is, domestic and imported goods are likely to be imperfect substitutes, especially in cases with the levels of aggregation commonly used in applied work. As an approach, Armington (1969) postulated a weighted price formation mechanism in which the domestic price of a good is generated by a function that applied weights to the fraction of the regional consumption of the good that was domestically produced and the fraction imported into the region.

In constructing the CGE model for this study, the SOE assumption was used as the basis for constructing the model of the seven states region. This well-developed approach has the advantage of fairly modest data requirements while maintaining theoretical soundness. The linkages between the regional economy and the rest of the world are maintained through the assumptions implicit in the SOE approach: the region takes the world prices as given and differences in products by origin are accommodated through the Armington functions. Since the bulk of the region's trade is with the rest of the U.S., the assumption of "world" prices is a reasonable one. In keeping with the SOE assumptions, the flow of funds from outside the region are fixed at the baseline levels. This condition is based on the fact that the regional economy, while large in absolute terms, is a fairly small part of the national economy.

Domestic consumers are assumed to have a CES utility function over domestic produced and imported goods (for a given category of goods):

On the supply side, a comparable construction yields a CET function between domestically consumed (XD_i) and exported (E_i) goods:

The CGE model describes a regional economy within the U.S. economy. For a regional economy there are no trade deficits. Any difference between real imports and real exports is made up through the capital account as funds flow into the region or out of the region to balance the goods and services account.

Several conditions must be met for an economy to be in equilibrium and are specified in the model closure conditions. Supply must equal demand in all markets (goods and factors), the external sector account must be in equilibrium (imports equal exports plus/minus capital account flows), and savings must equal investment. By Walras's Law one of these conditions is redundant. The current model omits the savings-equal-investment condition as the redundant closure condition. The government sector is permitted to run a debt financed through borrowing. Additionally, the model also specifies some conditions as fixed in order to close the model. Capital is fixed by sector thus the model solves for labor movements in response to exogenous shocks. Labor is freely mobile across sectors, and the labor market clears when aggregate demand equals aggregate supply. These relationships assume that the direct impacts being evaluated are not large.

The CGE model allows the analysis of the national economic efficiency effects of the actions taken under listing and the designated critical habitat. A measure of the change in producer surplus is computed directly in the CGE model as the change in rents earned in the producing sectors. Since capital is fixed in the short run, these rents represent producer surplus. Household consumption is computed as:

The following is adapted from Boadway and Bruce (1984, 212-213) and is also discussed in Varian (1992).

Of course, there are various means of obtaining exact measures of consumer surplus changes from individual expenditure functions. This is widely used when dealing with changes in a price or quantity of a single good but the data requirements are beyond what is typically available in a general equilibrium analysis. In fact, the story is much more complex. The Laspeyres and Paasche indices just described relate to a single consumer. In order to aggregate these measures over all consumers in the economy some rather stringent conditions must be met. In particular, the marginal social utility of income must be the same for all persons. This is not likely to be the case. However, policy questions must be addressed and it is common to add the surplus changes across consumers. Boadway and Bruce provide some rationale for this approach in pages 262-263.

The test of the accuracy of the CGE model is its ability to reproduce the benchmark data set as the equilibrium of the model. The 1995 direct impacts were scaled to reflect the level of economic activity in the 1982 benchmark data set. These direct impacts were introduced as changes in the components of final demand for the various sectors.

Implementing the Case Studies in the Context of the Act

The BEA projections include data on employment by sector and state and were used to project the gross output by sector on the basis of the 1982 or 1990 coefficients and ratios. The employment/output ratios for each sector calculated from the 1989 baseline model were used to generate the sector output levels for the baseline projections. The generated gross output figures were then used to generate the remaining baseline forecast data. This forms the benchmark against which the impacts due the critical habitat effects on economic activity within the respective region were compared. A recovery projection was developed utilizing the direct effects of the resource reallocations as inputs to the models. The impacts associated with listing and the designation of critical habitat were measured as the present value of the differences between the baseline and recovery scenarios.

The Virgin River flows through one the fastest growing regions in the U.S.. Recent and projected population growth in this region is significantly above the state average levels for Utah and Nevada. Recent population projections undertaken by the local public agencies in the St. George, UT area were used to modify the BEA data.

In many cases it is difficult to distinguish between economic impacts attributable to listing a species as threatened or endangered and the economic impacts associated with designating critical habitat for that species. Technically, listing impacts are those associated with protecting individual members of a species from harm, while critical habitat impacts are those associated with protecting the species' habitat from harm. A plan to drain a pond filled with endangered fish, however, would harm both individual species members and their habitat, thus posing the dilemma of how to allocate the impacts of not draining the pond to listing versus critical habitat designation.

Because it is difficult to separate the impacts of listing from the impacts of critical habitat designation, the standard approach is to estimate the combined impacts of both and then judgmentally allocate a proportion of total impacts to each cause. The rationale for the allocation method used in the Colorado River and Virgin River studies revolves around the timing of critical habitat designation relative to listing.

This approach was used in the critical habitat study for the northern spotted owl (Schamberger et al. 1992), and to our knowledge all critical habitat studies that have taken place since then.

At the time that each of the four Colorado fishes were listed, the Service reported that their habitat needs were not determinable. Critical habitat designations were undertaken later as the result of a lawsuit filed by environmental groups.

The second class of direct impacts arise from changes in the demands for goods and services stemming from actions taken on behalf of the fishes. The changes in the river flows required for the fish result in a change in the timing of the municipal and industrial water delivery projects that have been planned as an integral part of the region's projected growth. Moving these projects up in time increases the unit (acre-foot) cost of the water and moving the projects back in time reduces the unit cost of the water.

The changes in the cost of the water were introduced in the form of a change in final demand that is apportioned across all sectors of the economy. Thus, an increase in the cost of water to users will result in increased expenditures on water. Under the fixed budget assumption of the small open economy, the increased expenditure on water must crowd out other expenditures. An extreme assumption is that the demand for water is infinitely inelastic. That is, the quantity demanded does not fall as the price rises. In this case, the increase in the cost of water delivery results in an increase in the level of expenditure on water of a per unit cost increase times the original quantity of water delivered. [This assumption ensures that the water projects recover all costs including those associated with accelerating the projects in time.] In effect, all of the cost increase for each water delivery project is absorbed as an increase in the expenditures for water by the users in the area. Thus, crowding out is complete, the expenditure on all other goods in the economy falls by the exact amount of the increase in the level of expenditure on water. This is the assumption that underlies the computation of the direct impacts. For the purposes of the I-O analysis, the expenditure change was prorated across the sectors in proportion to each sector's share of total final demand.

In the Virgin River study the major impacts were projected to occur in the agriculture sectors as land is retired from agricultural production and the construction sector through increased costs due to water conservation. All sectors experience some impacts due to the increased cost of water as delivery projects are modified to meet the needs of the endangered fishes.

For the Virgin study two impact scenarios are developed. Table 2 presents the values for each scenario. The first scenario, the construction scenario (ST), meets the increased instream water demand on behalf of the fishes by bringing proposed structural water delivery projects on-line earlier than previously planned, and accelerating ongoing conversion from agricultural to municipal and industrial uses. The second scenario, the conservation scenario (CO), in addition to some accelerated construction of water delivery projects, assumes that increased water demands are partially met by reducing per-capita water consumption through a series of water conservation measures. These measures include more efficient appliances and plumbing as well as xeriscaping.

Table 3 presents the Virgin River critical habitat direct and indirect impacts for sub-regional and the region. The sub-regional impacts are determined for two counties: Clark County, Nevada and Washington County, Utah. The impacts in Clark County include those to the small section of Mohave County, Arizona, that is included in the study region. As no direct impacts accrue to Iron County, Utah, no separate county-level impacts are calculated. Under the construction scenario, the net present value (NPV) of output losses in Clark County is -$10.6 million, a deviation of -0.00001 percent from the baseline. For Washington county, impacts under the construction scenario are slightly larger, but still small. The NPV of lost output is -$47.5 million, a reduction in economic activity by -0.0016 percent from the baseline.

Under the conservation scenario, no direct impacts accrue to Clark County. Thus, only impacts in Washington- County are presented. Implementing the conservation scenario will reduce the N.V. of output by -$13.7 million, a change of less than -0.00046 percent from the baseline. In terms of output, impacts are actually positive after the year 2025, when increased construction costs for more efficient buildings are offset by reduced expenditures on water. The designation of critical habitat will reduce the number of employed on average by four.

For the Virgin study, the regional impacts due to the designation of critical habitat is projected to decrease output by an N.V. of -$59.8 million for the construction scenario, a deviation of -0.0001 percent from the baseline. For the conservation scenario, the N.V. of lost output is -$20.9 million, a deviation from the baseline by less than -0.0001 percent.

Estimates of the direct economic impacts of critical habitat designations for the four Colorado River endangered fishes are presented in Table 4 (A, B, and C). These impact estimates reflect annual output changes in directly-affected industrial sectors in the various states without considering indirect effects on production in other sectors of the state economies. The impacts are a direct reflection of the resource allocations described in Section 3.

Critical habitat designations in the upper basin (Table 4-A) would tend to shift irrigation water use to lower basin states relative to baseline conditions. As a result, Colorado and Wyoming would experience reduced output in the livestock feed and other crop sectors totaling about -$2 million annually by the year 2020. New Mexico would suffer a -$10 million annual output decline in those sectors by the year 2020. Those declines would be more than offset in the Lower Basin (Table 4-B), however, by a $13 million increase in California's agricultural output by 2020.

Colorado Study National Efficiency Effects

The CGE model reports changes in levels of output by sector, earnings, employment, gross regional product (GRP) and government revenues. These measures are reported as deviations from the baseline. In this analysis, labor supply is free to grow within the region. Economic links with the rest of the U.S. (and the world) take place through imports and exports of goods and services, foreign borrowing (investment), and employment payments from outside. The Armington and CET functions described earlier account for the external linkages that take place through the goods and services markets.

It is important to note that although the results are reported for the regional economy that these incorporate national impacts through imports and exports and labor mobility.

An alternative to this assumption is that the economic consequences of the listing and proposed critical habitat designation are confined to the markets in which the direct impacts occur. That is, there are no indirect effects that are felt in related markets.

The hydropower capacity that is lost due to the changes in the hydrographs in the with-fish scenario is a sunk cost. The owners of the resources in this sector will experience a loss but not the national economy.

To select the most likely scenario for the future would involve detailed projections for these sectors and such projections are not available. All additions to thermal generation capacity require the withdrawal of resources from elsewhere. The net result is a direct impact of zero for the construction and combined manufacturing sectors. The true situation most likely lies in between these polar cases, by presenting these extremes, the bounds on the actual outcome are provided. The solution is to construct a set of scenarios which provide boundary estimates of the overall economic effects.

Two polar scenarios related to the direct regional impacts projected for 1995 regarding thermal facilities are reported.

Scenario A:

There exists sufficient underutilized capacity in the construction and capital equipment sectors (within the basin or elsewhere in the national economy) that all additions to thermal electric capacity are a net positive addition to the level of national economic activity. The recreation resources within the basin are unique and the loss of these recreation opportunities cannot be replaced within the U.S. economy.

Scenario B:

There is no underutilized capacity in the construction and capital equipment sectors (within the basin or elsewhere in the national economy) and all additions to the thermal electric capacity within the basin are constructed with resources that must be displaced from elsewhere in the national economy. Thus, there is no net positive impact from this expenditure on thermal expansion. The recreation resources within the basin are unique and the loss of these recreation opportunities cannot be replaced within the U.S. economy.

Exclusion Process and Conclusion

The economic impacts associated with critical habitat designation arise from the required resource reallocation. The impacts are typically regional, rather than local, and thus necessitate regional economic modeling. The appropriate modeling framework must capture both the aggregate and distributional consequences resulting from resource reallocation caused by the designation of critical habitat. Applied general equilibrium models, either input-output (I-O) models or computable general equilibrium (CGE) models, are suitable for these purposes. Partial equilibrium models are inappropriate as they assume that resources not employed in the sectors constrained by the critical habitat will simply cease to exist instead of being reallocated within the regional economy. By the same token, focus on local impacts will obscure potentially offsetting (or magnified) impacts at a regional level. Applied general equilibrium models circumvent this problem by explicitly incorporating the resource reallocation within the regional economy.

The method of analyzing the economic impacts of designating critical habitat and the exclusion process is more than of academic interest. To date, the only USFWS sponsored studies we are aware of which analyze critical habitat impacts in a general equilibrium framework are those presented in this paper. This type of analysis is essential for the exclusion process. A critical habitat exclusion process requires that the analysts promulgate some criteria deciding whether or not to make an exclusion. For both studies, the recommended threshold for exclusion was one percent deviation from the baseline projection of aggregate economic activity (Department of the Interior 1994; Brookshire, McKee, and Schmidt 1995). The geographic scope ofthe study and the breadth of the economic impacts required that the criterion be based on aggregate economic activity. In the spotted owl study, the threshold was defined in terms of change in employment in the logging industry at the county level.

The consequences of adopting a narrow region for analysis and an essentially partial equilibrium framework are most apparent in the case of the critical habitat assessment for the northern spotted owl. In that case, the exclusion process resulted in approximately 40 percent of the critical habitat initially proposed being excluded. It is by no means certain that the outcome would have been different had the northern spotted owl study utilized an applied general equilibrium model. Perhaps, however, less habitat would have been lost as a result of the exclusion process.

References

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• Berck, P., S. Robinson, and G. Goldman, 1991, "The Use of Computable General Equilibrium Models to Assess Water Policies," in Dinar and Zilberman (eds.), pp 489-SO9, 1991.

• Berrens, R.P., D.S. Brookshire, M. McKee, and C. Schmidt. 1997. "Implementing the Safe Minimum Standard Approach: Two Case Studies from the U.S. Endangered Species Act," unpublished manuscript, The University of New Mexico.

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• Brookshire, D. S., M. McKee, and G. Watts. 1993. Draft Economic Analysis of Proposed Critical Habitat Designation in the Colorado River Basin for the Razorback Sucker, Humpback Chub, Colorado Squawfish, and Bonytail, Volume II. Prepared for U. S. Department of the Interior, U.S. Fish and Wildlife Service, Salt Lake City, Utah.

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• Brookshire, D. S., M. McKee, and C. Schmidt.1995 . Economic Analysis of Critical Habitat Designation in the Virgin River Basin for the Woundfin and Virgin River Chub: Final Report Prepared for U. S. Department of the Interior, Fish and Wildlife Service, Salt Lake City, Utah.

• Brooke, A., D. Kendrik, and A. Meeraus. 1992. GAMS: A User's Guide (release 2.25), The Scientific Press, San Fransisco, CA.

• Dervis, K., J. De Melo, and S. Robinson, 1982. General Equilibrium Models for Development Policy, Cambridge University Press, New York, NY.

• Endangered Species Act, 1973 and amendments

• ECO Northwest. 1994. A Method for Estimating the Economic Effects of Habitat Protection, Final Report, ECO Northwest, Eugene, OR.

• Maddux, H.R., L.A. Fitzpatrick, and W.R. Noonan. 1993. "Colorado River Fishes Critical Habitat: Draft Biological Support Document," U.S. Fish and Wildlife Service, Salt Lake City, UT.

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