Financing operation costs ignores the endogenous part of costs in the decision making process. Preserving nature can be done in several ways and each one incurs different costs. As explained earlier, the goal of this paper is to demonstrate the role of pricing under such a plan. We chose to concentrate in the DNR since it is an example of an open reserve. Such reserves suffer from lack of proper investment which causes not only inappropriate treatment of visitors, but also degradation of environmental and natural conditions.
Visitors to the DNR who answered the Travel Cost survey, were provided with information about inappropriate management capabilities and were asked about their frequency of future visits if those conditions were to be improved (Becker and Choresh, 2007; Eagan and Herriges, 2006; Fleischer and Tsur, 2000). Based on the new visitation rate we re-estimated a new demand function which is above the previous one. This equation is given in 7.1.
(7.1) Pd = 37.83 – 0.0005Vd
Costs of upgrading the services provided in the reserves were estimated after a detailed consultation with the local ranger. The total cost is estimated at 639,000 NIS.
Note that with respect to the previous cost (108,000 NIS) there is an increase of 531,000 NIS (592%). Our analysis was done with respect to full consideration of the possible upgrade opportunities. One can also analyze partial investment policies.
The benefits were derived by the difference in the average net benefit per visitor times the number of visitors at the given investment level (current or upgraded). This was estimated at 4,324,388 NIS. It is 3.42 million NIS more than the previous benefit level (Benefit ratio of 4.8)8. The net benefit of the upgrade plan is, therefore, given by equation 7.2:
(7.2) NB = (4.32 – 0.90) – (0.64 – 0.11) = 2.89 million NIS.
This is clearly a Pareto improving plan. The question is, however, how we finance it under the price regimes analyzed previously, namely, independent versus joint management.
We compare only the cost recovery pricing mechanism, since this is the only interesting scenario to compare for an entire system of reserves (two in our case).
8 Other benefits include reduction in rescue teams and the reduced cost of injuries and fatalities due to unnecessary accidents in the gorge itself.
For independent management we equate equation (7.1) to 639,000 NIS. For a joint management scenario we substitute in equation (6.2) 639,000 NIS instead of 108,000 NIS and solve for maximum of equation (6.1) subject to (6.2) being satisfied. The results are presented in table 7.19.
Table 7.1 about here
When there is independent management and the development plan is on the table, there should be a sharp increase in the entrance fee at DNR up to 12.73 NIS. This is an increase of 10.81 NIS relative to the current situation. Despite the fact that due to a higher price, visitors can enjoy a higher quality reserve, such a dramatic increase in admission fee can spark antagonistic reactions. A joint management policy, on the other hand, puts most of the burden on GNR and thus creates a much lower price increase in both reserves. The increase is only 5 NIS in GNR and 1 NIS in the DNR.
It is also interesting to note that there is a possibility of self- sustaining financing with the development plan. An independent management policy in the DNR has the ability to generate 639,000 NIS; the reason being that despite the dramatic increase in the admission price, the quality of the site attracts more visitors. Hence the number of visitors enables the NR to collect enough funds to operate, even independently, without cross subsidy. This is in contradiction to Laarman and Gregerson (1996) who claim that in general, development plans are not self sustaining.
7. Summary
50% more then the shadow price of the budget constraint under independent management and no development.Managing NRs is a complex task because there are several objectives that are usually in conflict with one another. Revenue generation, congestion management and provision of the site as a public good are goals that must be addressed carefully. Due to the fact that these goals are somewhat mutually exclusive, optimal management must take into account the multifaceted nature of NR services. Unfortunately, there are not so many management practices that NR authorities can really employ.
Available techniques can be thought of as either quantity or price management.
Quantity management limits the quantity of visitors to a site through the use of queuing, or requiring reservations at specific entrance points or specific days. Pricing strategies are usually associated with entrance fees although there can be other ways to achieve them.
This paper deals with NR pricing strategies with an Israeli case study. Two NRs were analyzed: Gamla nature reserve which is a "closed reserve" where one has to pay admission at the entrance point and Darga river nature reserve which is an open reserve where entrance is free.
In the first part of the paper, we dealt with four pricing strategies: Free access, cost recovery, maximum revenue and price differentiation according to sites. A trade-off was traced between revenue and efficiency which can be of help to policy makers. It was found that a differential pricing system yields minimum DWL while still generating the required revenue to operate both sites. This, however, requires visitors in one site to pay for operational costs in the other.
In the second part of the paper we dealt with a development plan to be considered at the open reserve. It was shown that on cost benefit grounds, the plan is Pareto improving. It was also shown that it can be self-sustained under independent management. However, it is less efficient than price differentiation. Cross subsidy,
such as the one presented in the paper, can also cause reserves to increase price less dramatically because the plan is financed by several reserves (In this case, only one financed the plan since we dealt with only two reserves).
In Israel, price differentiation is the norm and not the exception. Not only is it practiced by sites but also by individuals in relation to visit frequency. However, the price differences are not based on a model with specific targets and given constraints.
Thus, in Israel, and in other locations as well, price differentials might be less equitable but should nonetheless be given proper consideration regarding implementation.
Future research can be expanded to other sources of differentiation, as mentioned above, and also to a larger number of reserves. For example, there might be a cluster of reserves close to one another which could be managed as one unit. Caution, however, should be given to the fact that if the reserves are close enough to each other, cross price elasticity should be taken into account. Thus, increasing admission price in one reserve can push visitors to its neighboring reserve, bringing significant ecological consequences.
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Figure 4.1: Cost Benefit of NR development plan
Figure 4.2: Investment plan with several NRs
V P0
∆NB = S
2- S
1MB1
MB0
MC1
MC0 P1
S2
S1
if
S
2 >S
1 →∆NB
>0P P0
P1
MC
V
MC
V
DWL = ∆NB1
NB2
∆
MB1
MB0
NR 2 NR 1
P P
If ∆NB2 > ∆NB1 → ∆NB>0 NB = ∆NB2 – ∆NB1
∆
Total revenue
Fig. 6.1 Demand curves for GNR and DNR
0 50 100 150 200 250 300 350 400
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000
Visits
P
DNR GNR
Fig. 6.2: Price – Revenue relation at GNR
177, 8,491
0 2,000 4,000 6,000 8,000 10,000
0 50 100 150 200 250 300 350 400
P
TR (thousand)
TR רדיס2ה
Fig. 6.3: Price – Revenue relation at the DNR
15, 450
0 100 200 300 400 500
0 5 10 15 20 25 30 35
P
TR (Thousands)
TR
Fig. 6.4: DWL and TR at the GNR
11.5, 18
177, 4,245 177, 8,491
11.5, 1,066
0 3000 6000 9000 12000 15000 18000
0 50 100 150 200 250 300 350 400
P
DWL \ TR (Thousands)
DWL TR
Fig. 6.5: DWL against TR at the DNR
2, 108
15, 450
15, 225 0 2, 4
100 200 300 400 500 600 700 800 900 1000
0 5 10 15 20 25 30 35
P
DWL\TR (Thousands)
DWL TR
Table 5.1: TCM regression results - GNR GNR Parameter (variable) Linear Semi -
Log
Log pseudo likelihood -991
*Indicates significance at 95% level.
t-values are given in parenthesis (z-values for the count data model)
Table 5.2: TCM regression results - DNR
Site DNR
Parameter (variable) Linear Semi - Log
Log pseudo likelihood -1063
* Indicates significance at 95% level.
t-values are given in parenthesis (z-values for the count data model)
Table 6.1: Summary for existing situation at GNR – Independent management
Table 6.2: Summary for existing situation at DNR – Independent management (In NIS)
Table 6.3: Joint management under current operating costs (All monetary values are in NIS)
Price Visitors Revenue DWL Benefit Costs
GNR separate
11.5 92,700 1,066,050 17,872 16,963,637 1,066,050 DNR
separate
1.92 56,153 108,000 3,700 896,300 108,000
GNR combined
12.05 92552 1,174,050 20,601 17,860,857 1,266,074 DNR
combined
1.02 57,961 63,574
Table 7.1: Independent pricing versus joint management under a possible development plan
Price Visitors Revenue Benefit Costs GNR
separate
11.5 92,700 1,066,050 16,963,637 1,066,050 DNR
separate
12.73 50,198 639,000 1,268,957 639,000 GNR
combined
17.25 91,145 1,572,251 18,368,893 1,705,050 DNR
combined
1.84 71,975 132,434