Worth of Watersheds: A Producer Surplus Approach for Valuing Drought Mitigation in Eastern Indonesia

Duke Economics Working Paper No. 99-10

37 Pages Posted: 3 Apr 2000

See all articles by Subhrendu K. Pattanayak

Subhrendu K. Pattanayak

Research Triangle Institute - Center for Economics Research (CER)

Randall A. Kramer

Duke University - Nicholas School for the Environment; Duke University - Department of Economics

Abstract

This study combines hydrological modeling with applied micro-econometric techniques to value a complex ecosystem service: drought mitigation provided by tropical forested watersheds to agrarian communities. Spatial variation in current baseflow allows estimation of drought mitigation values as the marginal profit accruing to agricultural households. The paper shows that this uncommon focus on producer (not consumer) surplus measures is appropriate for valuation as long as markets for commodities related to the environmental services are complete. For the typical household, the estimated marginal profit is positive, validating the central hypothesis that baseflow makes positive contributions to agricultural profits. There is some evidence, however, that increased watershed protection will increase profits through greater baseflow only in watersheds with a unique mix of physio-graphic and climatic features. The paper evaluates and provides some support for the hypothesis, put forward by hydrological science and the Indonesian Government, that protected watersheds can supply latent and unrecognized ecosystem services to local people.

Keywords: Economic-Ecological Modeling, Watershed Protection, Drought Mitigation, Valuation, Profits, Producers Surplus, Tropical Deforestation, Indonesian National Parks

JEL Classification: Q2, Q12, H41

Suggested Citation

Pattanayak, Subhrendu K. and Kramer, Randall A., Worth of Watersheds: A Producer Surplus Approach for Valuing Drought Mitigation in Eastern Indonesia. Duke Economics Working Paper No. 99-10. Available at SSRN: https://ssrn.com/abstract=202295 or http://dx.doi.org/10.2139/ssrn.202295

Subhrendu K. Pattanayak (Contact Author)

Research Triangle Institute - Center for Economics Research (CER) ( email )

3040 Cornwallis Road
Research Triangle Park, NC 27709-2194
United States
(919) 541-7355 (Phone)
(919) 541-6683 (Fax)

Randall A. Kramer

Duke University - Nicholas School for the Environment ( email )

Box 90328
Durham, NC 27708-0328
United States
(919) 613-8072 (Phone)
(919) 684-8741 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

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