Economic factors in the development of a coastal zone

[From the U.S. Government Printing Office, www.gpo.gov]

oastal Zone"
inforrnation
Center
MASSACHUSETTS INSTITUTE OF TECHNOLOGY

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ECONOMIC FACTORS IN
THE DEVELOPMENT OF A COASTAL ZONE

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(A report prepared for the National Council
on Marine Resources and Engineering Development)

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@@c . 2 September 1970

"This study was financed by a contract with the National
Council on Marine Resources and Engineering Development,
Executive Office of the President. However, the findings,
recommendations, and opinions in the report are those
of the contractor and not necessarily those of the Council,
nor do they imply any future Council study, recommendation,
or position. It is hoped that this study will contribute
to the full discussion of problem areas and issues in
marine science affairs."

U.S.DEPARTMENT OF COMMERCE NOAA
COASTAL SERVICES CENTER
2234 SOUTH HOBSON AVENUE
CHARLESTON , SC 29405-2413

Property of CSC Library

Acknowledgements

This report was supported by the National Council
on Marine Resources and Engineering Development as part
of a project studying the economics of ocean activities.
The M.I.T. task group gratefully acknowledges the con-
tinuous stream of support and direction received from
Dr. Robert Kay of the Marine Sciences Council, the
project's director.

This report was prepared by an M.I.T. interdepartmental
task group under the direction of Dr. A. H. Keil, Head of
the Department of Naval Architecture and Marine Engineering.
Technical supervision was provided by a Steering Committee
consisting of Professor R.S. Eckhaus, Professor C. L. Wilson,
and Profnssor 11. C. Wood. Principal authors were Professor
J. W. Devanney III, Mr. E. Derbes, Professor William Seifert
and Mr. W. Wood with contributions by Professor E. Frankel,
Professor L., Thurow, Mr. J. Lassiter.5 and Mr. P. Taborga.

A large number of governmental and academic authorities
hav& reNTiewed earlier drafts and provided substantial
comments. Although it would be infeasible to name them all,
we would be particularly remiss if we failed to acknowledge
the help of Col.. W. McGuiness, U.S. Army Corps of Engineers,
Mr. Garfield of the Bureau of Outdoor Recreation, and Dr.
Milton Johnson of E."@).S.A.

We would also like to acknowledge the help of
the staff of the New England Plarine Resources Information
Program at the University of Rhode Island. This is not
to imply that these individuals or the organizations
they represent are necessarily in agreement with the
results of this study for which we alone are responsible.

TABLE OF CONTENTS

ECONOMIC ASPECTS OF OCEAN ACTIVITIES
VOLUME II

ECONOMIC FACTORS.IN THE DEVELOPMENT OF
A COASTAL ZONE

Chapter Page

I. INTRODUCTION AND SUMMARY 1

ii. THE ECONOMICS OF THE DEVELOPMENT OF A
COASTAL ZONE 9
III. EXEMPLARY COST-BENEFIT ANALYSIS 60

IV. REGIONWIDE DEVELOPMENT STRATEGIES 93

Appendix A Alternative Development of Hull

Appendix B The Pilgrim Power Plant

Appendix C Strategies for Handling the Demand
for Oil in New England

CHAPTER I

INTRODUCTION AND SUMMARY

Preamble

Currently before'the Congress, there are a number
of bills relating to the management of the coastal zone..*
Recently proposed legislation meeting thisdescription
includes S28,02,, S3183, S3554, S346o, HR13247, and HR14845-
These bills Are in part a manifestation of the increasing
dissatisfaction with the present means of allocating
the coastal zo ,ne which operates essentially through
the private market modified by local zoning and taxation.
policies. The majority of these bills provide for federal
support for the establishment of state coastal zone
authorities with broad ranged decision-making powers
meeting federal standards. The bills differ primarily
with respect to the federal agency to which the federal
responsibility for the coastal zone will be assigned.

The purpose of thisreport is not to evaluate the
respective merits of these bills or even of state coastal
zone authorities per se, but to make three fundamentally
important points relating to the future managem6nt of
the coastal zone:

1. To develop the reasons for and the situations in
.which the private market will operate to allocate the
coastal zone in a manner which is inconsistent with the
values of the economy:

2. To develop the reasons for and the situations
in which local control will operate to allocate the coastal
zone in a manner inconsis@tent with the values of the economy.

For the purposes of this report, the term "coastal zone"
refers to the land/sea interface including not only-the
narrow strip on either side of the shoreline, but also
the hinterland and the offshore waters insofar as they
affect each other. This definition is unsatisfactorily
circular. In actual allocation problems, the definition
of what is and what is not the coastal zone is contingent.
upon the problem at hand. If the problem is the provision
of a recreational beach, then a rather narrow definition
may be used. If the problem is the establishment of a
containerport, the relevant hinterland may extend a thousand
miles inland. While we find the more concrete definitions
suchas those used by the Committee on Multiple Uses of,
the Coastal Zone (the continental slope to a line joining
the head,s.of estuaries) as useful guidelines, in an actual
an'alysis they-must necessarily be violated and reference:-
made to the above general principle.

3. To argue that the fact that,the present system can
be expected to operate inefficiently in many coastal zone
situations is a necessary but not sufficient condition
for the establishment of m@_re 5-roaa-based decision -making
bodies. The proponents of such measures must not only
argue that the present system is inefficient--an argu-
ment which this report attempts to make precise--but also
that the decisions emanating Prom the more broad based
6ody@will be more consistent with the economyys desires
than the pre-sent decisions, despite the fact that thi's body
,is necessarily further removed from the discipline of the
market and from the localities which will be most affected
by its decisions. The latter point is much more difficult
to make then the former and the report suspends judg-
,ment on its general validity.

The report does tug down some principles by which
such a body should operate. The report emphasizes that
the responsibility of such a body is not to impute
its own values (the values of the individuals on'that
.body) to coastal zone decisions, but rather to attempt
to.discover what the values of the economy served are
and then to be consistent with these values. The
practical means for implementing this philosophy, cost
benefit analysis, is briefly outlined and its application
to coastal zone decisions explored in some detail.

This application and exploration takes place in
part through the investigation of four specific examples
of coastal zone problems:
(a) The provision of a recreation facility in Boston
Harbor.)
(b) The redevelopment of the coastal town of Hull,
Massachusetts,
(c) The location of a nuclear power plant near Plymouth,
Massachusetts,
(d) The establishment and location of a refinery complex
in Maine and the associated oil distribution problem.
All these problems are taken from the coast of New England
north of Cape Cod, an area we have termed the Northern
New England Coastal Zone. This geographi'c specialization
necessarily introduces a s omewhat local flavor to parts
of the study. However, the problems span a representative
spectrum of coastal zone allocation decisions, and we believe
that the principles developed through these investigations.,
if not spe*cific results, are generalizable.

It-should be emphasized that this report is aimed at
coastal zone decjs@orr-makers, whether federal, state, :or
local,,, many of whom will have had little or no exposure
to the principles of efficiency in resource allocation.
Experienced practitioners of cost-benefit analysis will
find little of methodological or theoretical'irLterest herein.

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They may note with interest-

a. Our emphasis on the explicit inclusion of,un-.
certainty within the analysis using subjective
probabilities;

b. Our uncompromibing position with respect to
secondary (our term is "Parochial") benefits,
especially from the point of view of the framer
of federal policy toward the coastal zone.

The core of this report consists of Chapters 2,3,
and 4. Chapter 2 outlines the economics of the coastal
zone in the abstract, defines the concept of economic
efficiency (makes precise the sense in which an invest-
ment or allocation can be said @o be corsistent with the
values of the economy),points out the mechanisms by
which the private market can fail to allocate.the
coastal zone efficiently and their relative importance,
introduces the concept of parochial benefits,* and.
outlines how local control can sometimes operate to
produce allocations which are more inefficient than.
the private market by overcounting of benefits to the
locality which are balanced by disbenefits accruing
outside the purview of the local authority, Finally,
Chapter 2 considers problems introduced by the fact that
the decision-making body can almost never predict the
future upon which the desirability of their alteri@ative
investments depends with certainty, and,introduces .
methods for incorporating this uncertainty within the
cost-benefit*analysis.

Chapter 3 illustrates the practical problems
involved in the application of cost-benefit analysis
to the coastal zone and some of its limitations through
'the investigation in some detail of a particular coastal
zone problem, the development of a particular island@in
Boston Harbor for recreation. This alternative is analyzed
from start to finish (with the help of some heroic assump-
tions about cost) both as a pedagogic device to illustrate
cost-benefit analysis to those unfamiliar with it and as
.a means for developing the limitations of this method
and showing how it must be combined with informed judgment
in actual decision-making.

In the literature, effects which we te,rm"parochial
benefits" are generally called "secondary benefits."
However, our concept of parochial benefits is somewhat
more limited than that ordinarily connoted by secondary
benefits, hence the introduction of a new term. Parochial
benefits refer to the benefits associated with the ex-
penditures on the inputs to an investment and the respending of
these _.- expenditures.

Chapters 2 and 3 arebased on a project by project
type of analysis. Chapter 4 attempts to illustrate how
such piecemeal analysis might be integrated into region-
wide coastal zone development, pointing out that project
by-project analysis can result in significantly inefficient
suboptimization unles's such integration is imposed. Chapter
4 also discusses alternative zoning and taxation plans
for implementing regionwide development strategies.

A guiding philosophy of this effort has been that
it is impossible to develop useful economics in a vacuum.
Therefore, we have investigated a number of specific coastal
zone problems in addition to our exemplary cost-benefit
analysis. Three of these investigations are outlined
in Appendices A,B, and C.

Appendix A is the study of recent decisions made
by the coastal town of Hull, Massachusetts, which occupies
a peninsula jutting into Boston Harbor and contains
one of the best beaches on the northern New England
coast. This.study is not really a cost-benefit analysis.
It is a case history of how coastal zone decisions are
actually made rather than a normative example of how nil
they should be made. This study illustrates how coastal
zone decisions are viewed from the locality involved,
indicating that the decisions which are made generally.,
have nothing to do with economic efficiency, priVate
market or otherwise, but are based almost entirely on
the marginal effects of the proposed new development on
the property taxes of the present residents. Hull is
a unique piece of geography whose optimal development
could materially affect the social welfare of the
eastern Massachusetts region as a whole. This example
indicates how decisions of this importance are being made
and will conti-nue to be made underthe present system.

The second example problem given in the appendices
addresses itself to the wisdom of the location of the
Pilgrim Power Plant, a 655 megawatt nuclear installatinn
presently under construction on lightly-developed shore-
line south of Plymouth, Massachusetts. This effort
attempts to assay the external costs or benefits associa-
ted with the plant's thermal discharge, and the effect
of an industrial development on surrounding residential
properties. This example was chosen because projections
indicate that power generation will place rapidly-escala-
ting demands on the shoreline in the not too distant, future.

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Our on-site investigation of the external,effects
@associated with the plant immediately brought out,-th 'e
importance,6f parochial benefits tothe local residents,,
pointing out once a-gain.that geographic localiza-
tion of transfer payments is a major determinant of
present coastal zone @Lllocations. At the same time,
our analysis of the.effects on themarine ecology
indicate that these latter effects are unlikely to
be significant in this case. We caution against generali-
zation of this result for"it in part depends on some
rather unique characteristics of Cape Cod Bay, but
the analysis does serve to indicate that industrial
uses will be part of an efficient allocation of the
coastal zone even when nonmarket effects are included
in the analysis.

The-final example offered is a study of future
oil processing and distribution systems for the
northern New England coastal zone which is given in
Appendix C. The question of the establishment and
location of a refinery complex in northern New England
is perhaps the single most important decision under
active consideration with respect to the northern
New England coastal zone. Appendix C p.oints out that,
if a refinery is to be built, its location should depend
almost entirely on locational differentials in these
nonmarket disbenefits. We believe that the refin'ery
question-deserves the most intensive sort of cost-benefit
analysis in view of its critical effect on the overall
development of the northern New England coast. However,
no such an analysis is undertaken herein. Appendix C
concludes with a comparison of alternative oil distri-
bution systems fornorthern New England with and without
a refinery.

While Appendices A,B, and C are, strictly speaking,
logically independent of the core argument developed in
Chapters 2,3,.and 4, we regard them as integral parts
of the report and as important as the core in developing
an understanding of the practical allocation problems
facing the coastal zone.

CONCLUSIONS AND RECOMMENDATIONS

After studying the economics of the coastal zone, this
report concludes that conscientious, effective, long-range
planning and control of the coastal zone at the state and
federal levels will be required if serious misuse of the
shoreline is to be avoided. The argument is as follows:

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1. The basic premise of this report is that economics
in a sense wide enough to cover all significantly import-ant
values, both market and nonmarket, can be usefully applied
to coastal zone allocation, that is, to the problem of.
determining that mix of uses of a particular coastal
zone which is most consistent with the values of.the JJ
economy which uses that coastal zone.

2. We take the view point that the amount a
person values a good, whether it be a market or nonmarket
commodity, can--at least conceptually--be measured by
the amount that he is willing to pay for that good under
a postulated income distribution. Given this premise
the report equates consistency with these values with
an allocation of the coastal zone such that there is
no change in allocation to which everybody would agree. ra
Such an allocation is said to be economically efficient.

3. This report, after studying the private market
as-a means of coastal zone allocation., concludes that
market mechahisms will result in an allocation of the
coastal zone which is seriously inconsistent with these
valuQs. The.reasons for this misallocation are all
the standard market imperfections: transaction costs;
undervaluing of collective goods, spillovers,
and goods subject to decreasing costs; but they all
seem to apply with special force to the coastal zone
and they all systematically result in overallocation
of the coastal zone to private uses and underallocation
of the zone to public uses.

4. This report then examines the political organi-
zation which has evolved in part to correct the inefficiencies
of the private market with respect to the coastal zone.
For the most part, this consists of local zoning and taxa-
tion policies under the control of the shoreline communities.
The report then points out that this is an inefficient means
of allocating the shoreline for, even if each community
operates optimally within its own confines, the total
shoreline allocation will be suboptimal, due to lack of
consideration of alternatives in which one community
specializes in a certain shoreline function while another
specializes in some other.

5 . The report goes on to argue that not only will
local planning fail to result in those corrections to the
private market results which would make the coastal zone
allocation efficient, but, even more importantly, they

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will often result in allocations which are worse-than
the private m arket results. Whenever a local board is
faced with a development proposal, its first thought
is toward the secondary or parochial benefits of the
project: the effect on local payrolls and retail
earnings, broadening of the tax base, all those effects
which.from the point of.view of the project and the
economy are costs. This report argues that these
parochial benefits are almost always not net benefits
from the point of view of the entire economy, but
rather transfer payments from therest of the economy
into the goegraphical locale of the project. To put
another way,, thesame parochial benefits would accrue
wherever the money which must be invested in the project
was spent. Thus., from the point of view of the economy
as a.whole., these parochial benefits are usually a wash.
Yet., with these wash benefits which are quite real to
the local community, an aggressive developer can obtain
zoning variances ' tax abatements, etc. Given paroch 'ial
ben'efits,, the local community is in no position to
bargain with,the large-scale developer. If the develop-
ment is large enough, an investor can whipsaw an entire
state or region in this manner. The question of the
locat'ion of a refinery in New England may be a case in
point.

6. Given the inefficiency of the private market
with respact to the coastal zone and the inefficiency,
of local.control ' the only feasible alternative appears
to.be control at the state level with some federal in-
fluonce to prevent parochial benefits.from being used
against an entire state. We strongly support the
Stratton Commission's recommendations concerning the
establishment of state coastal zone management authorities.

7. However, the establishment of such bodies im plies
some rather heavy responsibilities. Once the discipline of the
private market is abandoned, coastal zone analysis requires con-
scious economic analysis,for it -is not enough to show that the
present system is seriously suboptimal. One must also argue
that the proposed changes in the allocation process will
result in coastal zone usage which is more consistent
with the economy's values than the, old, a much harder job.

8. Insofar as coastal zone allocation can be regarded
on a project-by-project.basis, the methodology for imple-
menting this conscious economics is cost-benefit analysis.
Unfortunately, the present state of the art with respect
to cost-benefit, analysis and the coastal zone leaves
much to be desired and, until a state coastal zone authority
can reliably determine the use of the coastal zone most
consistent with people's values, it cannot promise to

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do much better than the private market or local
political entities.

9. A case in point is the treatment of uncertainty.
No one would claim that we can predict with certainty
.what the future effects of our present development
in the coastal zone will be, or how we will value
these effects, or what technological alternatives
will be available to us in the future. However, un-
certainty is rarely considered explicitly in present
cost-benefit analysis. This is particularly crucial
in the situations where the costs of being wrong vary
greatly with the possible alternatives. An example is
the development of marshland. If the marsh is developed rim
and later undeveloped marshland turns out to be very
valuable3 then the costs of transferring back to marsh
are quite high. If the marsh is not developed and turns
out not to be very valuable, it can then be developed
and the only loss is the differential in benefits in
the interim. On the other hand, the economy cannot
use uncertainty as an excuse for doing nothing. This
report outlines how uncertainty can rationally be
included in'coastal zone., cost-benefit analysis.
rim
@10. Another problem with locational cost-benefit
analysis is that, if performed too narrowly, seriously
inefficient suboptimization can occur. The problem
is-to approach coastline allocation comprehensively
while, at the same time, retaining analytical feasibility.
Given the compromises that must necessarily occur; the
results of cost-benefit analysis must be used with some
judgment.

11. In summary, with respect to the coastal zone,
we can conclude that:

a. The private market cannot be expected to operate
efficiently, local control won't work due to
overcounting-of parochial benefitS3 so some
form of state and federal action with respect
to coastal zone development is necessary. '"
b. If this planning and control is to be benef1cial,
the state and federal agencies must have means
for determining what'is an efficient allocation
of the shoreline.
C. 'Properly developed and applied cost-benefit
analysis will furnish these means for many, but
not all of the decisions which will have to be
made. This report is a preliminary effort at
this development and application.

CHAPTER II

THE ECONQMTQ@IS QF THE DEVELOPMENT OF A COASTAL ZQNE

The Basic Problem

The problem is ho w to alloc ate an essentially
fixed supply of coastal zone resources among the
growing public and private demands for coastal areas.
The historical answer has been to allow supply and
demand to determine the usage of coastal areas through
the p@7ice mechanism--the use which would pay the mo,st
for the property obtained it. Zoning provisions, public
ownership, and tax laws have all had an impact on the
market results, but the current allocation is essen-
tially the result of private market operations. In-
creasingly, these results are being called into ques-
tion. This dissatisfaction requires some explanation,
for it is not difficult to demonstrate that the allo-
cation of resources resulting Prom competitive market'
operations can have some rather attractive properties.

Before we can make any substantive statements
about how society should allocate the coastal zone,
we will have to establish a frame of reference, a
basic set of assumptions about society's goals, about
what is good and what is bad, with which.assumptions
we desire our coastal zone decisions to be consistent.
It is the purpose of this section to exhibit the set
of assumptions about social values with which we will
operate in this report and to contrast this set of
assumptions with'some of the other possible view@oints
that one might take..

Some Basic Considerations Regarding Social
Choice and Public Investment

After the inevitability of death, perhaps the most
pervasive, the most basic fact of life for both an
individual and society is that neither can have as much
of everything as he or it desires. At any point in time
the amount of all types of resources--land, minerals, water,
air, machines etc.--is fixed. This basic limitation impli .es
that a society cannot have all it wants of everything.
It must forego some goods in order to obtain others.

The term good, in this cont ext is to be interpreted
in its original sense to mean anything desirable whether
it be a material good (a physical commodity), a psychologi-
cal good, an esthetic good, or whatever. Thus, air quality
or esthetic architecture is a good in this context
as long as more is preferred to less everything else
being equal. No te that without loss in generality we can

define all non-material goods in question in a positive
sense. That is, we will talk in terms of air pollution
abatement or water quality rather than level of pollution).

However, there is one important difference between
the typical material good and the typical non-material
good which we must keep in mind from the onset. Most
material goods have the characteristic that the use
or consumption of a unit of the good by one person
effectively prevents someone else from consuming the
same unit of that good. On the other hand, many
non-material goods such as clear air or beautiful
scenery can be consumed communally. One person's
enjoyment of the good does not prevent, or often
even diminish, the ability of the good to be enjoyed
by another. We shall call goods which fall into the
first category private goods; those which fall into the
second, collective goods, and will have cause to refer
back to this distinction in the future.

For now the basic point remains, in terms of the
underlying limitations on our set of resources, it is
clear that all types of goods, both private and collec-
tive, compete with themselves and with each other for
an economy's resources in the sense that only certain
combinations of all goods are attainable given the
fixed set of resources. This set of attainable com-
binations of goods is generally represented by the produc-
tion possibilities surface which is defined by
= maximum amount of jth
good attainable given
that all the other
goods are fixed at
levels

It should be clear that this definition is symmetric
in the xj's and generally the production possibilities
surface is represented implicitly in the following
symmetric form.

The production possibilities surface divides the space

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of all combinations of goods into three mutually exclusive
subspaces.
T(xi,x21 ... IxN)< 0
T(x l-'x2"'"xN ) 0
T(xl.,X 21''" xN)> 0

Figure 2.1 illustrates a possible, three dimensional
production possibilities surface.

Water quality

Production possibilities
\K surface

i guns

butter

Points inside the surface represent wastefull combina-
tions of butter, guns, and water quality.

Points on the surface arewastefree

Points outside the surface are infeasible

FIGURE 2.1 A HYPOTHETICAL PRODUCTION POSSIBILITIES SURFACE
FOR A THREE GOODS ECONOMY

In 1-.he -Lrirst case, the combination of coods is such that
the societly could have more of a' least one good with-
out giving up any of another good ', or equJivalently
the society could have morr,, nC every gnnd.* We shall-
call such a combination )f gnodF, wa,-,te-Nl_. In the rim
second case, [the combination of goods is ora the pro-
duction possibilities surface and the society cannot
have more of any good without giving up a positive
amount of some other good (s). In this case, the
economy will be said to be wastefree. In the final
case, the combination of goods is not attainable by
any arrangement of the resources of the society
and this combination is said to be infeasible.

This very basic breakdown points to two inter-
related but distinguishable subproblems within the
general problem of determining how a society's re-
sources should be allocated:

A. Problems involved with moving from a wasteful
to a wastefree allocation which offers more
of all goods then the wastefull.

B. Problems involved in choosing from among the
wastefree allocations, from among the points
on the production possibilities surface.

Problem A is clearly a technical problem because
everybody will '. agree that the move is beneficial. This
technical problem involves identifying a change in
allocation that is better or at least as good in
every dimension as the present allocation. At the project
level, this is the domain of cost-effectiveness where one
specifies the levels of all dimensions except one and
searches for that alternative which maximizes the remaining
dimension,generally termed effectiveness. Thus, no con-
ceptual problems attend cost-effectiveness typeproblems.
However, such analysis, should not be disparaged: there
are many more wasteful proposals around than wastefree
and the determination of the wastefree ones (more precisely,
the ruling out of the wasteful ones) is almost always use-
ful and rarely trivial.

However, the remainder of this section and the bulk
of this report will be addressed to problem B and means
of choosing one among the set of wastefree allocations
which somehow is to be more preferred by the society

As long as more of one good implies less of another
good along the production possibilities surface,
if one can increase one good while holding all others
constant, one can increase more than one'gqqd without
giving up any of the other goods.

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than others.

Essentially, four different methods fo@, making this
difficult choice have been @.,uggested in the past. We
might characterize them as follows:

1) The dictator.,
2) Intrinsic suitability,
3) Representative political consensus,
4) Willingness-to-pay.
The basic p'roblem here is that in order to choose
between the points on the production possibilities sur-
face, one must impute a set of values to this surface.
One must, for example, decide whether a society values
100,000 tons of steel more than a 10% decrease in air
pollution.one car more than ten TV sets, etc.,, for
all combinations of such commodities on the production
'possibilities surface. This would be a difficult prob-
lem for an individual, let alone a society whose purpose
is-to somehow reconcile the differing value systems of
each individ!ual.

*1) The first of our methods, which we have called
the dictator in which an individual or a small cohesive
group unabashedly equates its own values with those of
the society is historically one of the most popular
methods and counts among its attempts at allocation some
of the developments of which man is most proud. it
has had its failures and does have its disadvantages.
The most basic one is that it begs, albeit in a rather
effective manner, the basic problem of reconciling in-
dividual value systems. If a society accepts one of
a number of ethical precepts about the value of the
individual, this at-times-attractive possibility is no
longer open to it. Therefore, since we are attempting
to shed light on the coastal zone allocation problem
in a country which has made an at least theoretical
commitment to the individual, we will consider it no
longer. Perhaps the most important present-day propo-
nents of this system in the USA are certain of the more
architectural schools of thought in urban planning.

2) An allocation scheme for land which has achieved
some prominence in the last few years is based on the
idea that, on the basis of natural geological and eco-
logical characteristics, one can identify certain areas
as intrinsically suitable for certain purposes and other
areas as intrinsically unsuitable for other purposes.
Having made this identification, one implements zoning
procedures consistent with it. This viewpoint, which

_13-

underlies the arguments of many conservationist groups,
has been most fully developed by McHarg, reference(l).

This philosophy raises questions of how one deter-
mines intrinsic suitability and, more basically, if one
bases development decisions strictly on natural charac-
teristics, one may find, for example,.that all of Oregon
is intrinsically suitable for recreation but none of
Nebraska. However, it is not clear that zoning provi-
sions implementing this finding would lead us to the
allocation which would be most consistent with society's
values., however defined. Even more importantly, this
approach begs the hard questions which are precisely the
issues on which the decisionmaker needs the most help-
For example, one may determine that Machias Bay in Maine
is intrinsically suitable for preservation and wilder-
ness recreation (it is an unusually beautiful bay which
is probably unique on the East Coast with respect to
lack of previous development) and also that Machias Bay
is intrinsically well suited to oil transhipment (it is
unique. on the East Coast in being able to handle tankers
of greater than.80 foot draft within 1/4 mile of Shore in
sheltered water with direct access to the sea).

In'actual practice, this scheme, at least as
developed by McHarg, is applied very flexibly, leaving
a wide range ofalternatives open. In short, pushing
this idea very hard leads to some rather strange
allocations; insofar as the idea is not pushed hard,
it begs the basic question and becomes 'a useful adjunct
to allocation rather than a means of determining this
allocation.

3)@ Some form of representative political concen-
sus, based directly or indirectly on the ballot, is
practiced presently in a large part of the world. Such
a process would be strengthened and formalized under
present legislative proposals with respect to the
coastal zone.

The ballot in all its forms has its share of pro-
blems both practical (keeping representatives' values
consistent with constituentsl:,providing a spectrum.of
alternatives) and theoretical (tyranny ofthe majority,
indivisibility of the vote). Attempts to be.precise
about the manner in which a representative process is or
can be made to be consistent with the values of the
societ y represented have either been unpersuasive or

productive of only negative results (e.g. the intransi-
tivity of democratic choice).(2) This report will
attempt no such analysis of the political structure of
either the'representative process in general or the
rather unique politic4l structure of the Northern
New England Coastal Zone in particular; but rather
take as obvious:

a) The political structure we are dealing wi'th'does
have the ability to take substantial discre -
tionary action--to commit resources, regulate
markets, and.transfer income-

b) This political structure wishes to make those
decisions which are somehow consistent with
the values of the society it represents.

c And that this political structure needs help
in determining which of its alternatives merit
implementation under the above criteria.

In short, this report is going to accept the re-
presentative consensus view of life in some ill-defined*
sense and to be concerned with making this definition
more precise only in so far as resource allocation is
concerned.

4) This brings us to the fourth valuation scheme
which we will call 'willingness-to-pay'. Under this
set up, each individual is regarded as 'the sole judge
of his own welfare. Furthermore, each individual
is assigned control (private property rights) to a
certain amount of resources (land,, capital and labor)
and he is free to exchange these resources for any of
the goods produced by the society according to any
mutually agreeable bargain with the controllers of
these goods. Generally, this exchange is facilitated
by a surrogate good called money which has the advan-
tages of being universally accepted, divisable,
easily transferable, etc. in which case the indivi-
dual's control over his set of resources translates
itself into income.

Given this setup one can rank a person's preferences
according to his willingness to pay. Thus, if a pers,on
is willing to pay $1.00 of his income for a hamburger
and 50 cents for an object d1art, then by this scheme
we presume he values the hamburger more than the piece
of art.; and that if he obtains the'hamburger he is
better off than if he.obtains the work of art. Thus,
we are assuming that all the values a man has for a
good'whether it be amaterial good, an esthetic good,
or a psychological good can be quantified by ftnding

-15-

out how much of other goods he would be willing to forego
to obtain the good in question. Note that this valuation
scheme applies to,collective goods as well as private
goods. Thus, if someone claims he values a certain
decrease in air pollution more than a TV, yet a group
is formed which with the aid of $100.from him could
achieve the increased'air quality and the man spends
his $100 on the TV, we regard his claim as, at best,
meaningless.

Given that one accepts this valuation scheme, the
problem is to find that public poli,cy which tends toward
that configuration of the coastal zone which is in
some sense consistent with the values so measured.
We shall put off for just a moment discussion of what
we mean by "consistent with wiliingness-to-pay" to
discuss a very important limitation on this valuation
scheme.

In order to use this scheme, one must accept or
assume a distribution of income, for willingness-to-
pay clearly depends on income. Every change in the
distribution of income will, in general, alter the
amounts that people are willing to pay for various
goods and, however we define consistency, if we are
to be consistent with the new set of values., the
allocation must change accordingly. Thus@, if on ie does
not regard the present distribution of incomeas
desirable, one c*annot be expected,to be happy with
the allocation consistent with the present "willingness-
to-payll.

The acceptance of an income distribution then is
a critical enabling hypothesis underlying all,the
analysis that follows. Therefore, it bears.some inves-
tion. First of all, it is patently clear that society
is not completely satisfied with the present distri-
bution of income. The existence of charitable organi-
zations, a progressive income tax, Social Security and
welfare, public housing, and myriad other existing and
proposed programs are manifestations of the society's
dissatisfaction with the present-income distribution.
On the other hand, if one doesn't accept the present'
income distribution, then one is faced with the problem
of choosing society's desired income distribution on the
basis of very little information if indeed the concept
has existential.meaning.., rim

Generally, our,approach will be to work with the
present distribution of income, not withstanding the
above mentioned clear indications that society does
not regard this distribution 'with complete favor, on
the following grounds:

-16-

Despite the above, society does not appear
to be prepared to opt for a radically different dis-
tribution of income.

2) If,a different distribution of income is
desired, it is generally more efficient to effect the
desired income transfers through lump sum payments
or., failing that, through differential taxation of
income, then through income transfers via publi c
investment or direct interference with markets.

3) The most important reason for accepting the
present distribution of income is that this hypothesis
despite its untenability in the strict sense, will
prove useful. That is, as so often happens in science,
we shall see that provisionally accepting a hypothesis
known not to be completely true, will allow us to
proceed with analysis which will reveal important facets
of a problem which facets would be di fficult to exhibit
without this assumption.*

4) Finally,.we@will not push this hypothesis
too hard. IA cases which the acceptance of the present
distribution of income is clearly inappropriate, such
as in the provision of an intown beach aimed at ghetto
poor, we will-revert to analysing a range of possible
sets of willingnesses-to-pay resulting from a range
of possible income distributions, obtaining for each
such set of values,- the system which is consistent
with that set of values. The resulting analysis will
not uniquely specify which is the indicated alternative,
but rather will serve to rule out all those alternatives
which are not consistent with any reasonable set of
values. The community or its representatives will some-
how have to decide among the remaining alternatives. As'
we shall attempt to demonstrate in Chapter III, this
ruling out process can be of a much more value to the
relevant decisionmakers in difficult situations than
the specification of a single"optimal" alternative
in simpler situations.

We shall have cause to return to the problem of
the specification of the income distribution in the
sequel, for now let us at least provisionally accept
the present distribution of income and examine in what
sense we can identify a particular configuration of the

The alternative is to revert to a vague discussion
of social welfare, which at best is non-productive and
at worst leads to such antinomious concepts as "the
greatest good for the greatest number", or 11maximum
regional income with minimum pollution."

economy--a particular set of goods.produced--as consis-
tent with the resulting willingness-to-pay.

Pareto-Efficiency

Consider a point on the production possibilities
surface, some wastefree combination of goods. Now
consider a proposed change in the combination of goods
produced. Some people will be willing to pay to see
this change occur. Some will be willing to pay to
avoid the change. If the people who desire the chang e
are willing to pay more than people who oppose it,
say a total of A versus a total of B with A> B then,
if we make the change and at the same time take B
from the proponents of the move and pay it to the,
opponents, then, after making the change, the opponents
will regard themselves as well off as before --they
have suffered the disbenefits of the change but have
been compensated by the amount they value these dis-
benefits--while the proponents will consider themselves
better off then before for they regarded the change
as.worth A and received it for only B. Or we.ean
make the change and take some amount of income between
A and B from the proponents and give it to the opponents
in which everybody will regard themselves -as better
off fhan before in terms of their own willingness-to-
pay. Everybody would be willing to pay a positive
amount for the change and compensation. Thus, accepting
individual willingnesses-to-pay as a valuation scheme,
,such a change is an improvement in an unambiguous manner
Everybody finds themselves at least as well off as
before (by their own values). If everybody's lot
,could be improved, in this manner, the orginal position
could not.havebeen consistent with maximum social welfare
defined in terms of willingness-to-pay.

With this argument as a hint, let us postulate
the following criterion for the narrowing down of the
set of points on the production possibilities surface
which we can regard as consistent with the postulated
income distribution and the resulting individual willing-
ness-to-pay.

A COMBINATION OF GOODS CANNOT BE CONSISTENT WITH
WILLINGNESS-TO-PAY UNLESS IT IS IMPOSSIBLE TO MAKE A
CHANGE IN THE COMBINATION OF GOODS PRODUCED, WHICH MAKES
AT LEAST ONE PERSON BETTER OFF ANDNONE WORSE OFF.

While this criteria appears to be pleasantly non-
controversial in that it seems to avoid comparing one
person's welfare with anothers it also appears woefully

incomplete. Most of the interesting real world choices
leave some people better off and some worse off and
the criterion does not seem to speak to these choices.
However, appearances are deceiving, a basic result
of micro-economic theory is that once we have accepted
an income distribution and the possibility of compensa-
tion, the above criteria is quite specific and in fact
there is an operationally unique configuration of the
economy which is consistent with the above criterion
and the postulated income distribution, (3 ).
Our criterion appears to avoid interpersonal compari-
sons but, in fact, such comparisons are implicit in
the acceptance of the income distribution.*

Social judgments based on the above criterion
are said to be Paretian and the configuration of the
economy such tbat no one can be made better off with
out someone being made worse off is said to be the
Pareto-efficient (or sometimes, just plain efficient)
configuration associated with the postulated income
distribution.**Thus, if we are going to follow the above
criterion, we must specify an income distribution and
then attempt to develop public policy which encourages
the Pareto-efficient configuration of the Coastal Zone
associated with the specified income distribution.

Pareto-Efficiency and the Private Market

Not only is there a unique configuration of the
economy which is consistent with willingness-to-pay
in the manner outlined, but further, in so far as there
are properly functioning markets for all goods valued
by the society, then it can be shown that the price
mechanism operating through these markets will tend
toward the Pareto-efficient configuration of the economy
consistent with the present income distribution.

*As we shall see, in practical applications this specificity
is more than a little misleading, as it turns upon the
possibility of compensation for all persons adversely
affected by a particular change. In the real world
this compensation may not be feasible for a Variety of
political and economic reasons. However, this "theoretical"
specificity does serve as a firm foundation upon which
we can make judgments about public policy concerning
the coastal zone if we accept willingness-to-pay as a
yardstick.
**A completely equivalent and slightly more concise way
of wording this is to say "it is impossible to make
everybody better off", for if one can make one person
better off hurting nobody, one can take some of the
increase of goods from the person made better off
and distribute them among all others.

3) In essense,'this is a result of the fact that.
in a price system, he who is willing to pay the most' for
a good obtains it.

Thus, given this report's provisional acceptance
of willingness"to-pay and this characteristic of the
market system, if there were properly functioning markets
for all coastal 'zone goods, we could end the report here.
In actuality, this is only the beginning, for throughout
the economy and in particular in the coastal zone, there are
many goods for which properly functioning markets do not
exist. in fact, there are a number of goods of increasing
social importance for which no recognizable market exists.
Therefore, our task is just begun, and we turn to a more
detailed investigation of those-areas in which the private
market system will not be consistent with willingness-.
to-pay.

Private.Market Failures

The requirements for a private market economy operating
through thp.price system to tend toward Pareto-efficiency
include:

A) Private access to all goods.
B) The amount of other goods foregone due to the
production of a unit of a particular good must
not decrease with the increased level of output
of the good in question.
C) Th ere exist markets for all possible go-ods including
side effects., It is not possible for a producer
and a consumer to, as a result of their prodij*(,tion
and consumption, decrease the goods enjoyefl by.-a.-
third party without the third party obtaining.,
compensation.
D) The provision of the information required to effect
the agreements and bargains through which the@
private market operates does not itself consume
resources.

Unfortunately, these conditions are of ten.violated
throughout'the economy and particularly along the coastal
zone where-development is intense and the social and
ecological interrelationships of various activities are
critically important and where, for at least th'e offshore
portion of the coastal zone, private property rights are
difficult t,o establish. In the following paragraphs we
review some of the situations in which we can e,xpect the
private market to operate.inefficiently in the,..coastal zone.

@-20-

In so doing., we shall find it useful to adopt the
following definition. The cost of a unit of particular
good is the maximum amount the people in that society
would be willing to pay for the goods foregone by the
society in order to obtain that unit of the good in
question. In terms oP this definition conditions B
and C can be restated: (B) The cost of A unit of a
good must not decrease with increased.level of pro-
duction of that good. (C) The consumer(s) of a parti-
cular unit of a good should bear the full cost of
the pro duction of that unit.

Notice that this is a technical definition of the
word cost which need not correspond to the common
usage meaning, roughly, the monetary outlay required
to obtain a good. It just so happens that, under
willingness-to-pay, in a perfectly functioning
price system, the monetary outlay required to obtain
a good and the value of the goods foregone due to
the consumption of this good are the same.. Thus,
in so far as our economy is not a perfectly functioning
competitive economy, in so far as the above conditions
are not met, a situation known as private market failure,
we will have to be careful to distinguish between the
two different usages of the word cost. In the sequel,
when the meaning is not made clear by the context,
we shall use the term social cost when we are referring
to the first definition and private costs when we
are referring to the second meaning.

We shall now consider each of the above conditions
in turn,

Collective Goods

The price mechanism will fail to operate in a
manner which is consistent with willingness-to-pay when
dealing with collective goods. Collective goods differ
from private goods in that individuals do not obtain
exclusive possession of the goods they purchase; they
are not able to exclude others from the use of these goods.
The prototypical example is national defense. If one
cannot exclude or be excluded from a particular good,
then it is rational for each citizen operating indivi-
dually to refuse to buy a good he desires, forcing others
to purchase the good which he then enjoys without cost
to himself. Of course, others reason similarly and
the good, for which the group as a whole may be willing
to pay a great deal, will not be provided. Thus,
collective action either through regulation or public
investment will be required if the Pareto-efficient
allocation is to be obtained in this situation.

-21-

In addition to goods which are pur .e collective goods,
i.e. exclusion..is impossible, everyone must consume the
same quantity,,there.is a more general and much more
numerous class of goods for which exclusion is technically
-he amount of resources.'(the cost)
possible,but for which t
of obtaining this exclusion is quite high, or society has
not found a politically feasible means of implementing
this exclusion. Examples include radio and television
entertainment,, highways, and access roads.

The private market can also fail on the input or
resource side due to difficulties in exclusion. One of
the most glaring examples of this kind of failure relates
directly to the coastal zone. Society has barely begun
to evolve a workable form of property rights to certain
offshore resources such as the seab.ed.' It has yet to
begin to establish any workable form of control.of the
resources in the water column. This leads to the-so-
called common pool problem with respecit to, for example,
fisheries. At present, private property rights-can not rM
be established on fishuntil the fishare caught.

In this situation, there is no incentive to. husband,the
crop. Fishermen operating individually will mine the
resources at a higher rate than would be rational if the.
fish were privately controlled,, for each will reason
that if he doesn't catch the fish someone else will.
In extreme cases, this leads to rapid depletion 'of a
fish stock and the establishment of piecemeal, generally,
ineffective, and almost always wasteful attempts at re-
gulating the fishery in question.( 4)

In general, then the unaided price mechanism cannot
be expected to operate toward a Pareto-efficient configura-
tion when prices in cases where private property rights
(exclusion) cannot be established efficiently. On the
goods (output) side this leads to underprovision of
collective goods by the private market'. and.on the re-
source (input) side it leads to overexploitation o.f those
resources for which private property rights cannot or have
not been established.

Goods Subject to Decreasing Co*sts*

There is a technical situation which presents, a very
difficult problem for the private market. When it works, Fix
the price mechanism owes its success at establishing
Pareto-efficiency in part to the fact that each person
is forced to give up the social costs of his consumption

-22-

of a unit of'a good in order to obtain the use of that
unit.. This assures that all goods for which the value,
of the use is greater to somebody than the value of
the resources used in the provision of that unit of a
good elsewhere is supp@ied. A market system also re-
quires that everybody @e charged the same price for the
same good. (Obviously, all buyers are going to.go to
the low price source of the good.) Now consider these
two facts and the following sort of situation. Let us
suppose we have a good in which, given the present set
of investments, the costs of supplying an.extra unit of
that good to a consumer is quite low. These additional
costs are called the marginal costs of the unit of the
good. It will pay the producer to supply this unit
at any price above its marginal cost and in a competi-
tive market the price will be driven down to the mar-
ginal cost and all units of the good (not just the
additional unit) will be sold at this price. If N
units of the good are sold, the revenue to the producer
will be M(N)-N where M(N) is the marginal cost. Unless
M(N)-N is greater than T(N)the total cost to the producer
of supplying all the N units of the good including in-
vestment costs, then the supplier will not make the,iinvest-
ment required to supply this good. None of the good:''will
be produced. This can happen despite the fact that-the
total amount that society is willing to pay for this good
is greater than the social costs of producing it,
some of the buyers may be willing to pay much more t.h4n
marginal,costs for a particular unit of the good.

. This dilemma can also be expressed'in.terms of average
costs. The average cost of producing N units is defined
to be T(N)/N. Thus, the condition that M(N) x N be greater
than or equal to the total costs will not be met if the
marginal costs are less than average costs at the level of
production called for by the market. It is easy to
show that *' average costs will be less than marginal
costs if and only if average costs decrease with increased
output.

In short, Pareto-efficiency requires that all consumers
be charged the marginal cost of producing a unit of the
good in question. However, if a private investor charges
marginal costs in a situation where marginal costs are
less than average costs (average costs are decreasing) he
cannot recover his investment and.the project loses money.
If average costs are charged, the project bi@eaks even but
the project is underutilized and resources are inefficiently
distributed.

The textbook example of this sort of market failure also
occurs in the coastal zone. Consider a lighthouse. Once
it is build and its light is flashing, additi6nal ships
may use the service without adding to the cost of operati,_-,-ns--
4Gn'e marg1rial cost, of an additional ship is sensiblj'- ze-r--

Lighthouse services should be supplied if, and only if,
the total amount all the users would be willing to pay for rim
the lighthouse (total savings due to smaller number
of shipwreaks and collisions, less delays, etc) is
greater than the social cost of constructing and operating
the lighthouse. At the same time, the charge to users
should be zero since the cost of the additioftb:l use is
zero. If not, a potential user whose savings resulting
from the use of the service is just barely positive would
be dissuaded from using the service. Then,we would be
in a situation where one person (this user) could be
,made better off (by allowing him to use the service free) ra
while making no one worse off. But no private investor
could be expected to devote resources to the construction
of the lighthouse if the price of his p rodudt must be
zero. Hence, collective action is indicated.

The Vibrvasiveness of goods subject to decreasing
average costs is often underemphasized. They include not
only almost all goods requiring large indivisible investments
up to capacity, almo,st all transportation and dilstribution
services up to congestion, and almost all communication
and information transfer services. With respect to the
coastal zone, obvious examples,are navigation and recreation
facilities up to capacity, scheduled shipping services and
the provision of terminals for marine transpoftati'on, power
generation 'and undersea oil production.- In s@hort, a
,substantial proportion of the uses 'to which the coastal
zone may be put are subject to decreasing costs which
goods will be provided inefficiently (through monopolies
.or cartels), if at all, by an unregulated free market.

Spillover Costs and Benefits

Perhaps the single most important reason for the
rising dissatisfaction with the private market as a means
of allocating the coastal zone has to do with spillover
effects. Spillovers refer to th-e effects of one person's
consumption of a particular good on people otherthan
those doing the actual consumption. The private market
conceives of a series of buyer-seller transactions in
which no one other than the buyer and the seller are
affected by the agreement that this pair reac,hes. In.
actual fact, there are few important economic'transac-
tions which can be made today which do not affect a large
number of' people, albeit often in a diffuse manner. Elbow
room is scarce both because of the increase in population
in general and because our elbows, magnified and multiplied
by modern technology, are bigger and sharper than ever.
Before 1900 a man chose to buy and ride a horse and the
only third party effects were an occasional dirty shoe.

-24-

Now a man in a car can add to the discomfort of an entire
town. And things promise to become increasingly difficult.
The number of possible social contacts and hence occasions
-for third party conflicts grows combinatorially with
population. As for technology, an agreement between
an airline and a passen&r may soon have the ability
to inflict discomfort on a person on the seasurface tens
of miles away from the plane.

Some of the most important of these uncompensated
third party effects have to do with our use of the en-
vironment as a sink for the material and energy flows
generated by an industrial society. Ayers and Kneese
have pointed out that even our use of the term con-
sumption is misleading.( 5) In actual fact, relativis-
tic considerations aside, matter is conserved and not
consumed. Material goods are at most altered by our
t1consumption" of them. Their material substance remains
and must either be reused or discharged to the environment.
The same thing is true of energy. Generally speaking,
the discharge of the residuals to the environment
takes place without any compensation to those who are
adversely affected by this discharge. This would cause
no great problem if the adverse effects were small, as
perhaps they were in the past. However, cases are rapidly
multiplying which indicate that in many situations our
discharges are exceeding the assimilitive capabilitfes
of the environment. As this happens, the adverse effects
become very large very fast, especially in view of the
fact that many ecological systems exhibit decreasing
ability to handle effluents when overloaded. This can
lead to an explosively unstable situation.

Given the magnitude and growth of our material flows
and the fact that we are beginning to overload natural
systems in many situations., It is clear that we can no
longer regard these third party effects as "somewhat
freakish anomalies" in an otherwise smoothly functioning
economic system ( 6

We will illustrate by several examples taken from
reference (7), how these third party effects can prevent
the market mechanism from functioning in such a manner as
to lead the society to a Pareto-efficient economic con-
figuration, that is, to get us into a situation where
everybody would be made better off in terms of willingness-
to-pay by proper interference with the marketImechanism.
Consider the problem of the heating of large buildings.
This function presently contributes 30% of the sulphur dis-
charged into Metropolitan Boston airshed. 8) Now., according
to the oil used and the amount of treatment employed, more

-25-

or less sulphur will be discharged into the atmosphere
as a by-product of space he.ating. The building owner
is interested in profits and he will choose that oil
and that level of treatment which performs the required
heating at least private cost to him. In the ditsence
of public action, the @uilding owner can be thought
of as envisioning his use of the atmosphere aa a
free resource.

Although the use of the atmosphere might be viewed
as a free resource by the heater it is certainly- not
without cost to those residing in the adjoining@lareas.
Not only does sulphur in its various forms contribute to
the deterioration of building exteriors and machinery
corrosion, It almost certainly has an effect, not yet
completely documented, on public health, and may'simply
be an esthetic bad, in the sense that people would@pay
to avoid this: bad., even 'if it had no physical 6ffe%ct on
men or materials. To the building owner the discharge
is' free;.to society it ha-s a cost. Private cost is no
not equal to*social cost., Yet., we have seen tl@at` a,
necessary condition for Pareto-efficiency is tl@at each
member of s'ocity bears the marginal social cost of his
actions. In this case,, the building owner'does not
bear the social cost of hi-s actions and hence will
discharge more sulphur than he would if he was forced
to bear them. The resulting configuration-may@not be
Pareto-efficlent. In this case, it may be possible
to make at leas-t one person better off and no one worse
off through@public action. This would be the case if
the amounts that those adversely effecte d by the sulphur
in the air were willing to pay to see a certain decrease,
exceeded the private cost to the heater of effecting thi-s
decrease, for these people would be indifferent between,
paying this amount and suffering the present level, but the
building owner would consider himself better off after
accepting,the payment and paying the cost of the decrease.
The unaided private market will never consider'.this
possibility,, for there exists no market through which those
adversely affected by sulphur in the air can demonstrate
their willingness to pay for less sulphur. In ..part, the
reason for the failure of such a market to evolve is
a product of the fact that air quality is a col lective
good.

The collective aspect of third party effects can be
seen more clearly in the next example; the automobile.
Assume that. an effective automobile smog control device
exists. It is obvious that, if consumers demand and are
willing to pay for s,uch devices, the automobile@ industry
would develop and sell-these devices with no public

-26-

prodding. The question is, would the public, actomg
individually, demand the number of smog control devices
consistent with its own willingness to pay for air
quality? The answer is no. For a person who was con-
sidering whether or not to order a smog control device
on his car would reason, quite ratiotioally, as follows.
If I purchase the device and everyone else does likewise,
then we will have less smog in the city. On the other
hand, my individual car can add only a negligible amount
to the smog problem so that if everyone else purchases
and I do not, I will enjoy sensibly the same air quality
and have saved the price of the device. Thus, if everyone
else purchases a device, I will be better off if I
do not get one. On the otherhand, if no one else other
than myself, purchases a device there will be a bad
smog problem. However, if I purchase a device the
problem will not be noticeably different, since my
individual car contributes a very small part of the
overall smog and I will be out the money that I paid for
the device. Thus, if no one else purchases, I shouldn't
either. Obviously, the analysis is the same if some
people purchase and some do not. In each case, the
amount the individual would be willing to pay for,
the difference in the smog due to the purchase ob-
tains from his own smog control device is less than
the price of the device.

Since all potential car buyers will reason in
a similar rational manner, the result is that there
will be zero demand for smog control devices. The
automobile manufacturers will have no motivation to
develop and market such a device. This conclusion
holds even if--and it is an if--collectively the
public would be willing to pay the cost of smog con-
trol devices for all cars in order to obtain the
resulting air quality. The point is that each pros-
pective buyer of a device suffers only a small part of
the pollution cost of his decision not to buy the
device. If he is one man in a million man city, he
suffers, very roughly speaking, one-one millionth of the
pollution cost. Once again private costs do not equal
social costs. A third party (the rest of the community)
is affected by the decision to buy or not the device
but is not party to the exchange.* (Please see the next page)

For a third example, consider the problem, of pollution
of an estuary by sewage emanating from a number of munici-
palities located on the estuary. For the purposes of dis-
cussion, imagine that the entire problem of pollution is
.

-27-

caused by organ@c material so that treatment which
removes the organic material,, which otherwise is broken
down by biological processes which consume the estuary's
oxygen, could solve the problem. (This is not the case.
Inorganic fertilizers often are a bigger problem
then oversaturation of the oxygen supply.) Thp.now
familiar dilemma would act to frustrate a-market
solution. Each muhicipality or sewage district would
reap but little of its own efforts at treating the
sewage, but it would bear the full costs of the
treatment. The third parties in the rest of the
estuary would not have to bear the costs of the
benefits they would perceive from the individual
town's investment in sewage treatment. Each in-
dividual town would come to the rational decision
to not pay,the cost of treating its sewage even
though al lr might be better off if all the towns
installed-such treatment.
FM
In short, wherever there is.a spillover or
third party effect for which no market exists,
Vhe price,mechanism may result in an economic na
configuration which is inconsistent with the
society's willingness to pay and public actio.n

This example also points out the futility of appeals
to conscience and social responsibility in sit.uations
where social.costs are not equal to private costs.
The more likely the appeal is to work, the less moti-
vation there is for an individual to be persuaded by
the appeal. If, due to an appeal a large portion of
the population bought smog control devices, the
remaining1ndividuals would have no need to b,e
concerned about smog,: let alone invest in further
reduction of pollution. The futility of such volun-
tary approaches is well recognized in most of the
situations with which we will be involv ed in this
report. 'The onlyarea where such appeals are still
given any credance involves, unfortunately,, the
single most important example of the divergence
of private and social costs population control,, a
divergence which is increased not decreased by.present
public po@licies. This problem is well treated by
Hardin( 9). In this report, population is 'regarded
as an exogenous parameter (not influenced by the de-
cisions being analyzed).Unless this very important
assumption is madethe obj-ective of being consis-
tent with individual willingness-to-pay-has little
operational meaning for, if population is a-Yariable,
willingness-to-pay can point to policies whibh lead
to larg.e,.populations with individually small willingness-
to-pay.
-28-

through regulation or investment may be warrented.

It Is important to note that spillover effects
can be positive as well as negative. Some goods
have positive effects to third parties in addiiion
to the private benefits they produce. Education
may be an example. It can be and is old privately.
It produces many private benefits, but it also pro-
duces a set of social benefits in terms of economic
growth, political participation, and perhaps social
stability. Often, these types of goods are called
11merit wants." Since each individual will only
consider private benefits when purchasing these
types of goods, each individual will purchase
too little of these goods when both )rivate and
public benefits are considered. Thus, society
often provides such goods free or subsidizes
them so that individuals will consume -nore than
they would if the private market were allowed to
function-unaided. Recreation and housing may both
fall into the category of "merit wants." With
.merit wants or goods, your consumption of the good
has a positive impact on my welfare level.
Contracting Costs
A fourth type of market failure which pervades
the whole economy an(! which may have special signifi-
cance for locational decisions involves the problem
of contracting costs. Strictly speaking, a private
market can achieve Pareto-efficiency only if the
social costs of achieving and insuring the voluntary
agreements through which the market operates, and
of providing the information upon which these agree-
ments should be bised, is zero. In actual fact,
the costs of achieving such agreements and such in-
formation can be quite high and sometimes prohibitive.
A significant portion of our national resources is
devoted to marketing and procurement, to sales staffs.,
police,.brokers, lawyers, and advertising; and sti 11 the
quality of the information and the variety of contracts
available is often far from satisfactory. The cost of
achieving a sale for some retail items can run many
times the cost of material,, fabrication., and transpor-
tation. A primary motive for vertical integration may
be reduction in the contracting costs associated with
interfirm transfers.

In situations where contracti ng costs are large,
reliance on governmental allocation mechanisms may
be more efficient than the use of the market for
government need not incur the costs of securing the

-29-

consent of all those who would have to be a party
to a voluntary agreement. Of course, giving up the
test of consent places a heavy burden on government
to insure that the proposed allocation would obtain
this consent. This is precisely the reason for cost-
benefit analysis which is nothing more than a systema-
tic means of estimating whether this consent would
be forthcoming.

Contracting costs can enter into locational decisions
in a manner which may have special significance for
locational decisions in heavily populated areas such
as the coastal zone.

Consider the case of regional development around
a large coastal city. For some reason ranging from
a unique geographic advantage to "this was where the
wagon broke down" development started at this point
in space. Once it was started it was socially and
economically advantageous for others to locate near
the development to attain the social advantages
of contact and the economic advantages ranging from
decrease in transportation costs to the benefits
accruing from the specialization a larger group allows.
In time, more firms and more individuals maximizing
their own ends, while considering the locational
decisiions of others as fixed, find that in this con-
strained sitation the best they can do is to locate
in and around the point of original development.
And development and growth continues. Now there may
reach a point, where the advantages of further growth
(more social contact, more specialization) is balanced
by the disadvantages (more congeestion, higher cost of
transportation, overloading of environmental systems,
lack of access to open space). At this point, a group
of individuals and firms may be able to do better in
terms of their own willingness-to-pay by moving simul-
taneously to a new location and founding a new community,
although it will not pay each to make the move individually
(the firms need people, the people need the firms and
other people). Of course, such a group could get
together voluntarily and move, but the process of getting
together is far from costless and a more efficient
means of establishing this getting together could be
through public action such as the New Towns program in
England.*

*We shall return to problems associated with the
provision of costly information in Chapter IV.

-30-

It is far from clear what the importance of this
type of hypothesized market failure is. One @s tempted
to argue that-it could be quite large and that a social
structure based on a system of smaller, individually
focused communities cguld leave everybodybetter off
than megolopitan sprawl.(10) On the other hand, a wide
spectrum of seminal nodes (existing towns) around which
such development'could occur by individually made
decisions, exist--some of these alternatives are being
taken advantage of (firms and people do move away from
the large city) from which one may argue that most
people are not operationally constrained by the loca-
tional decisions of others. We shall not attempt to
resolve the issues here but will have cause to refer
to this type of market failure in the sequel.

Summary of Market Failures

In summary, the price mechansim can breakdown in:

a) the allocati on of collective goods,,
b) the allocation of goods subject to decreaseng
cost5
C) the allocation of goods subject to spillovers,.
d) the allocation,decisions in which contracting
costs are large.

With collective goods, no individual has any incen-
tive to let the government or the market know how '
much he wants of these different goodsand how much
in taxes he would be willing to pay to obtain them.
Such a revelation would not significantly increase the
quantity of goods for which he is forced to pay. With
goods whose marginal costs of production are less than
their average costs of production, private markets
cannot efficiently produce and distribute the goods
while at the same time making a profit, or even breaking
even. Efficient distribution can only occur if the
producer loses money and private enterprise will never
undertake such operations.

Spillovers have no effect on market prices yet
they are important to welfare. Important negative spillovers
include the various forms of material and energy disposal.
Since the market does not account for these sp.illovers, it will
produce too much of goods subject to such third party effects.
With positive spillove@rs, the social, benefit-s of having
an individual consume some particular good exceed the
individuals private benefits.

Other individuals gain something from his consumption.
Since any individual will base his private decisions on
his private benefits and costs, the private market
will not produce enough of these goods. Finally;,.
problems with respect tp informational and organizational
difficulties in reaching contracts and collective decisions
will result in certain possibly superior alternatives not
being considered.

It should be clear Prom our discussion that the
above categories are far from mutually exclusive.. In
fact ' a close relationship exists between difficulties
in exclusion, decreasing costs, spillovers and contracting
costs*. We shall not examine this relationship nor
attempt to e-stablish that all private market failures
can arise from a smaller, more general set of causes.
It is more important to note that all the above type
of failures are biased in the same direction.

Although the market may inefficiently distribut,e
coastal areas, it is not randomly inefficient. Basi,cally.,
the market wi'll allocate too little of the coastline
to recreational and other public uses because it does
not reflect real preferences concerning collective goods,
because they are often subject to decreasing costs and
because positive spillovers are not considered. The
market will allocate too many resources to those uses
with negative spillovers because the social costs of
these spillovers are not considered. Generally, this
means too many resources will go to industrial uses.
Market allocat ion mechanisms systematically re.sult in
the underproduction of public goods and a corresponding
over production of private goods. In Galbraithian terms,
this is the crisis of social balance.. Relia-nce'on the
market will yield too many private goods and too few
public goods.

For all of these reasons, some method must be found
t.o supplement market allocation mechanisms. Market
results must be modified on the basis of further considera-
tions. In so far as the allocation of resources can be
accomplished on a project by project basis, the technique
for doing this is cost-benefit analysis.

Demsetz argues that@all market failures are explainable
in terms of contracting costs. (11)

-32-

Cost Bene'fit Analysis
The problem then is to develop a methodology which
will result in an allocation of resources which is consis-
-tent'with the willingness-to-pay of the individuals in
a society in the face of.,these market imperfections or,
more concisely, a methodology which will indicate the
Pareto-efficient allocation of resources associated
with a specified (generally, the present) distribution
of income.

Actually, given our previous rather lengthly spade-
work and development, or rather assumption, of the de-
finition of what is socially optimal the indicated
methodology is rather obvious in fact, it hardly
deserves the title "analysis".

Definition:

THE GROSS BENEFIT OF A PARTICULAR INVESTMENT
TO AN INDIVIDUAL IS THE MAXIMUM AMOUNT THAT
THAT INDIVIDUAL WOULD PAY FOR THE OUTPUTS
OF THAT INVESTMENT.

Thus, cost-benefit analysis assumes that all the
values a man has for a particular good, whether it be
a material good, an aesthetic good, or a psychologioal
good, can be quantified by finding out how much of
other goods he would be willing to forego to obtain
the good in question. In a market economy we can
measure the v*alue of the goods foregone in'money
terms or dollars which can be thought of as a generalized
claim on other goods, from bread to yachts, weighted
by their prices. In the words of Dupuit, who first
suggested this valuation scheme, "Unless there is will-
ingness to pay, there is no utility (value)." (12)
More formally, this valuation scheme is simply an
extension of classical consumer theory broadened to
include non-market goods.

This is not to imply that one can discover how
much people are willing to pay for a good by asking them.
For it is the nature of public goods that it is often
rational for an individual to misrepresent his desires.
If someone is asked how much he is willing to pay for
air pollution abatement and he feels that his answer
will not affect the amount he is actually charged, it
will pay him to over-state his desires to make air pollu-
tion abatement more likely. On the other hand, if the

33-

question is aimed at determining how much he is to be
taxed., it will pay him to understate his value knowing
that differentials in his individual contribution will
have almost no effect on the quality of the air.,(Dne
of the problems then, in estimating the benefits 'of a
public investment, will be to determine the real
amounts a person would pay despdt@ this systematic
misrepresentation.

In the collective good type of inves.tment with
which we will often be dealing,. one man's enjoyment
of a particular good does not prevent another from
enjoying it. In such cases, it is necessary to extend
our basic definition to:

THE TOTAL.GROSS BENEFIT ASSOCIATED WITH AN IN-
VESTMENT IN A COLLECTIVE GOOD IS THE AGGREGATE
OF THE MAXIMUM AMOUNT'S THAT EACH INDIVIDUAL USER
OF THAT INVESTMENT WOULD PAY FOR ITS OUTPUTS

This is straightforward generalization of the
basic premise,, to the case where more than one person
can use a p4rt'icular unit of good.; however, 'it emphasizes
the dependence on our valuation scheme.on the in-come
distribution assumed. Someone e,arning $30,000 may be
willing to p4y more for some frivolous luxury than two
or three people who earn $5,000 a piece in aggregate
are willing to pay for medical care. Yet, it would.be
a barren ethical or moral system which held that a rich
man's values are worth several poor peoples! The ethical
and moral problems entailed in our valuation scheme are
obvious.*

Another problem, raised by Galbraith, is that in a modern
economy peoples' willingnesses-to-pay can be changed
by the purveyors of various commodities. Taking the
position that peoples' willingness to pay, a variable
demonstrably and seriously influenced by advertising,
represents in some sense, a persons underlying pre-
ferences is more than a little uncomfortable. It re-
presents a clear bias toward those goods with the
most effective control over communications media. We
shall return to this problem in Chapter IV.

-34-

Our second definition is derived from the basic
observation that resources, including the coastal
zone, are scarce; that is, in using a resource for
a particular activity, we are giving up its use in
any other activity.

Definition:

THE COST OF ANY ACTIVITY IS THE BENEFIT, AS
DEFINED ABOVE, ASSOCIATED WITH THE OPPORTUNITIES
FOREGONE DUE TO OUR ALLOCATION OF RESOURCES TO
THIS ACTIVITY. WHERE MORE THAN ONE OPPORTUNITY
OR SET OF OPPORTUNITIES IS FOREGONE, THE COST
IS THE HIGHEST VALUED OPPORTUNITY OR ATTAINABLE
SET OF OPPORTUNITIES FOREGONE.

In the literature, this concept is generally called
the opportunity or social cost to distinguish it from
the monetary outlays required to purchase this activity.

The basic principle of cost-benefit analysis
follows directly from the definition of benefit, cost,
and Pareto-efficiency. In fact, it is merely a restate-
ment of the condition for Pareto-efficiency..

THE ECONOMY WILL BE OPERATING PARETO-EFFICIENTLY
IF IT PURSUES ALL THOSE ACTIVITIES FOR WHICH THE
TOTAL GROSS BENEFIT IS GREATER THAN THE TOTAL
SOCIAL COST.

Or, in other.words, only if all resources are
devoted to their highest valued use in terms of willing-
ness to pay is it impossible to improve the situation
in such a way that everybody will be made better off.,**

The adjective "social" in this sentence has no politi-
cal implications. It connotes that we wish to include
the costs to all individuals in society of an activity
in our calculations. A more neutral synonym would be
"total".

We would be the last to argue that the above outline
represents a complete justification of the foundations
of cost-benefit analysis. The purpose of this report
is to apply rather than to describe a cost-benefit
analysis. Those readers who are.interested in a
through discussion and justification of cost-benefit
analysis rather than the bare outline presented in
this section are referred to in references (13),(14),
and (15).

-35-

Our problem then is conceptuallyisimple: Find out
how much people are willing to pay for an particular
use or mix of@complementary uses of a resource in each
of the years during which the resource is committed
to this use, find out the social cost through t'ime
of each of these uses and allot that resource to the
highest-valued use.

Unfortunately, the problem of determining how much
people are willing to pay is usually anything but simple,
requiring in many cases a great deal of ingenuity, while-
in others is so difficult that it is not worthwhile.
In which case it may be quite useful to perform that
analyses over a range of postulated benefits to discover
which alternatives are consistent with which assumptions
about people-Is values and to screen out projects which
are not effidient under any reasonable set of assump-
tions about Values.

Usually, the problem of determining the opportunity
costs of an activity is somewhat simpler for, even in a
partially competitive economy, the market price of a
resource being employed in a particular use can be a
reliable meagure of its social costs. However.5 we shall
ser- that we will have t o tread carefully in this re-gard
also..
Present Value
The above base outline of cost-benefit analysis
must be modified to take into account people's pre-
ferences toward time. The existence of an interest
rate indicates that people prefer consumption of a
benefit now to consumption of the same benefit later-,
for unless people preferred a $1.00's worth of consump-
tion now to ($1.00 + i)1s worth of consumption a year
from now, it would be impossible to maintain an i%
interest rate.* On the cost side, if we delay'an in-
vestment in, say, a beach for a year, we will be able
to use the resources that would have gone intoa beach
elsewhere for a year. Therefore, the social cost
of building the same beach a year from now is less than
the social cost of building the beach now.

Tnis section assumes no price changes with time,
no inflation or deflation. Thus,, the interest rate
referred to is the inflation-free interest rate.
Inflation does not substantially change the following
argument, although it does present some.problems in
determining what the actual interest rate is in an
economy.
-36-

The proper technique for handling this effect of
time is to evaluate all the benefits and costs which will
be experience'd in year t, weight them by the factor
t
Dt= 1/ff (1+i m) where m isu,tbe interest rate in year m
M=O
which interest rate simultaneously represents the economy's
feelings about the relative value of consumption at the
beginning and end of year.m and the marginal opportunity
r.,ost of capital during year m. This weighting procedure
s known as discounting. After discounting, all the
discounted benefits and the discounted costs are summed
n1rer time to yield what is known as the net present
7ra).ue of the project. In symbols the present value
equals:
N N
V= E= D * B E=0DtCt
t 0 t t t

where:

V = net present value
t
Dt= discount factor for year t=I/L (l + i
M 0 m
Bt= value of benefits experienced in year t
Ct= value of costs incurred in year t. Costs should
be measured on a net cash flow basis, capital
expenses being realized in the period when they
actually occur. The discounting procedure
automatically takes care of amorization and interest
charges.

N = Lifetime of project

By an extrapolation of the argument for our basic
principle it can be shown that, if an economy wishes
tooperate Pareto-effIciently, projects with a positive
net present value should.be undertaken; projects with
a negative net present value should not be undertaken.
'If this rule were followed for all possible sets of
projects, the countiy would be achieving economic
efficiency.

-37-

It would be maximizing the size of the economic pie,
given its limited set of resources.* There would be
no alternative development pattern that everybody
would feel happier with given the postulated dis-
tribution of income, and in implementing each of the
projects indicated, it would be conceptually possible
to compensate those people who are affected negatively
by the project sufficiently so that they judge them-
selves no worse off than before. Proofs for this
thesis are given in references(13) and (14).

Choice of Interest Rates

In a perfectly functioning, risk free economy
determination of the interest rate to be used in
assessing projects would be no problem since such
an economy would be able to support only one interest
rate which would simultaneously measure peoples'
attitudes about consumption now as opposed to con-
sumption in the future and the value of the oppor-
tunities for investment in the private sector. (16)
In an imperfectly competitive economy such as ours
a whole range of interest rates can exist. In such
a situation, the problem of choosing an interest
rate becomes difficult and sometimes a critically
important decision.

*In less prosaic, but considerably more fanciful
terms, the economy would also be maximizing a
variable we might call net national social product
which would differ from the standard descriptions of
national accounts in that (a) it incorporates and
values the spillover costs and benefits associated
with the resulting allocation. (b) it incorporates
the values that people place on--the amounts they
are willing to pay for--public goods which may or
may not be provided free of user charge. We do not
mean to imply by this digression that the state of
the art in cost benefit analysis has presently ad-
vanced to the stage where an attempt to actually
measure the net social product of the economy would
be a useful exercise. It has not. However, con-
sideration of such a concept is useful in clarifying
our thinking about what is wrong with present national
accounts: as descriptions of standard of living. They
leave out spillover costs and undervalue public goods.
It also says something about the design of "social
indicators" a subject that has recently received
some attention (17).

-38-

The basi c principle is that the interest rate
in public project evaluation must.be the same as
that assigned by the private market to the resources
and benefits which will be used in and accrue from this
project. If a higher rate is used by government,
then public projects will fail to be adopted which
are more highly valued than the private uses of
the resources required for this project; if a lower
rate is used, public projects will be adopted where
the capital could be used for purposes of private
investment or consumption that are highly more valued
by the economy. As Baumol puts it, "The correct
discount rate for the evaluation of a government
project is the percentage rate of return that the
resources utilized would otherwise provide in the
private market." (18) The rate of return referred
to is the before tax rate of return, for taxes
are merely transfer payments from the owners of the
resource to society in general.

Now due to differing patterns of taxation, legal
restrictions lags in adjustment, differing access
to opportuni-Les, resources can earn a different rate
of return in different parts of the economy.

Baumol shows that in this case one should use
the weighted average of the rate of return for
the various sectors of the economy from which the public
project would draw its resources. (18) Thus, the appro-
priate interest rate would be lower if a public project,
for some reason drew all its resources from consumers
than from the production sector of the economy, reflecting
the fact that consumers generally have a lower oppor-
tunity rate of return than industrial concerns. If,
as is generally the case, the project draws resource
from both sectors than a weighted average should be
used.

The foregoing discussion ignores two problems,
inflation and risk. Inflation is fairly easily dis-
posed of. If inflation is expected to occur during the
lifetime of the investment, one has the option of
adding the inflation rate to the interest rate (as
the private market does) and inflating future costs
and benefits according to this inflation rate. Alter-
natively, one can attempt to determine the inflation
free interest rate, the so called real

-39-

rate of return, and use constant prices and values
in evaluating the costs and benefits throughout
the life of the project. Theresults will be
identical whichever method is used. We will
generally follow'the second course.

The effect of risk on interest rates is the
subject of some controversy in the economic litera-
ture at present. It has been observed that risky
investment generally demands a nominally higher
rate of return. In the sequel, it is argued that
the bulk of this excess is required in order to
to give risky investment the same expected rate of
return as riskless investments and thus, in con-
sonance with Baumolls princ,iple ennunciated above',
it is this average rate of return wh1ch should be
used. In so far, as risky investments demand a,
higher expected rate of return than riskfree(such
a difference would be required if investors are
risk adverse), there may be an argument for not
using the higher expected rate of return as the
interest rate in evaluating public projects on the
grounds-that, even if individual investors are
risk adverse, society as a whole should be an
expected value decisionmaker. We shall talk about
this more later. But for.now we merely note that
this difference between the expected rate of.
return required by investors on risky investments
and the rate of return on riskfree investments,
the so-called risk premium.,is much smaller than the rM
difference between the nominal rate of return on
risky investment and the riskfree rate of return.
If this is true, the weighted average return will
be approximated by the.riskfree rate of return. rN
In this report we-will be using constant-base
(1970) prices rather than current prices, thus
we requirethe real, pretax rate of return.

W-ith corporate Pates of return averaging
10-12% And riskfree private investment opportunities
of 8-9%; assuming a 4% inflation rate, leads to
appropriate real interest rates of the order Of 5 to
8%.

It is not the purpose of this section to pick
an interest rate but only to outline the principles
by which it should be chosen. We will use 5/0' in our
exemplary calculations. Often it will pay the analvst
to calculate the net present value of the alternative

-40-

projects over a range of interest rate and display
the sensitivity of the alternatives to this parameter.
For@after all, even if one can determine exactly
what the present opportunity cost is of the capital
being employed in the project-generally not true-
the future intere@t rates are random variables which
cannot be predicted with certainty.

Past.-government application of cost-benefit analysis
has tended to make the mistake of using too low an
interest rate, an interest rate considerably lower
than the risk-free opportunity cost of capital in
the private market. In the past, interest rates
as low as 2-1/2% were used. However, it is easy
to go too far in the opposite direction. Tn any
event, the special nature of public goods should
not be reflected in a low interest rate, but in
the measure of benefits. Benefits should be @orrectly
measured and private market evaluations should be
augmented. Interest rates should not be lowered.*

Interest rates should only be lowered if society
decides that it is consuming too much and investing
too little in both the private and public sector
in which case effort should be made to increase
both public and private in vestments to bring the
rates of'return in both areas down. Thus, it is
possible to argue that the interest rate reflects
too high a rate of time preference, but this argument
must be applied to both private and public investment.
The corollary is that the society ought to lower
the percentage of its output that goes to all current
conbumption (public or private) and raise the per-
centage oflits output that goes to'all future con-
sumption'(investment, public or private).

Since there is almost no evidence that society
wants to..radically shift its investment-consumption

Low interest rates for public projects have been
defended in the past on grounds that government
has a special responsibility to unborn generations
which the private market does not. This may be
true' but,if so, it should be reflected in the
future benefits of the project which, properly
calculated, will include where applicable, the
amounts thatpresently unborn people will be
willing to pay some time in the futurii_. Thus,
our choice of an interest rate is not biased
against future generations. Rather, it assumes
that these future generations will value immediate
over subsequent consumption in approximately the
samemanner as their forebe@irs.

-41-

mix, all coastal projects should be capable of earning
a real rate of return of 5 to 8%. A real rate of return
in this context does not, of course, mean a money
rate of return of this amount. Many of the public
benefits that are embodied in the real rate of return
of, say, 8% will not be recoverable in money terms.

Parochial Benefits Fill

In measuring benefits, it is extremely important
to distinguish between the direct and indirect effects
of a particular coastal zone project. The direct
effects are those which accrue to the consumers or
users of the project, the users of the power supplied
by a coastal generating plant, the bathers on a beach
the swallowers of polluted air, the inhabitants of a
coastal housing project, the viewers of marsh wildlife
The indirect effects are those that accrue to the
suppliers of the resources which make the investment
possible. These include the payments made to the
construction workers and maintenance personnel, sellers
of material and land, and in turn, the payments that
these groups make to bar owners, retailers, and so on.

Consider the construction of a nuclear power plant
on the shoreline. The plant will output electricity,
heated water and some chemical wastes, a visual im-
pact on the surrounding area, etc. These are direct
effects and the value that the individuals in the
affected region place on these effects measures the
various benefits and disbenefits of this development.

The construction and operation of the plant will
also require a number of inputs including land, labor
and material. The value of these resources diverted
o the plant is the cost of the development. Of course,
these resources must be paid for their employment for
they must bid away from other uses. The nuclear
plant construction worker will receive a sum of money
for working on the plant and this is certainly a benefit
to him. Further, he will spend a substantial portion
of his pay in the locale of the plant, and this is
certainly a benefit to the local merchants, doctors,
and tavernkeepers. These people in turn will spend
some of this money in the locale and so on. The same
argument could be used for the expenditure on any other
input. Values which arise in this manner we shall
term parochial benefits. The question then is should
we count all or part of the costs of the plant as a
benefit on the grounds that people in the locale would
be willing to pay something to see these expenditures
take place ?

-42-

From the point of view of Pareto-efficiency the
answer is no, given@ full.employment. For with full
employment, the fact that one has to pay a cons:truc-
tion worker $6.00,per hour to work on the plant means
he was worth $6.00 per hour elsewhere. Thus, his
employment on the plant means a loss to some other
project. Similarly, the parochial benefits which
ac6rue to the locale of the plant from the con-
struction workers' expenditures would accrue no matter
where the plant was located. Of course, different
shopowners would see this money if the location
were changed. More generally, wherever the 'money
(resources) were spent, be it on a plant or something
else, approximately the same parochial benefits would
accrue. Thus, from the point of view of the economy
as a whole, parochial benefits are a wash. One
can change their geographical incidence but they do
not represent any net economic values to the society.
Rather, they represent a transfer payment from the
entire economy to a more localized area. Given full
employment, the costs of a project cannot be counted
as a benefit. To do so is a subtle form of double
counting with which almost any project could be
justified.*

Another way of looking at this problem is as follows.
We could attempt to estimate how much the people
in the locale would be willing to pay to see the
expenditures associated with the plant take place
in their locale and then include this willingness
to pay in the benefits. But, if we did this,
we would also have to estimate what people in
other areas would pay to see the plant or an
equivalent investment take place in their locale
and include this willingness to pay among the dis-
benefits or costs of the project. Barring large
differentials in unemployment (see below) the paro-
chial benefits associated with one location will
be about the same as the parochial benefits
associated with another location. Hence, these
too sums will cancel. This is what we mean by
a wash. And we can save ourselves the computational
difficulties of trying to estimate these quantities
by leaving them out of the analysis altogether.

-43-

It is in the nature of things that even in--a
substantially full employment economy a large pE@rcentage
of resources:is underemployed at any given time', due to ra
lags in adjustment.. The physician in the locale of our
hypothetical power plant will experience an increase A
in his practice as the result of the plant's locating
there and, if he were,,underemployed,to begin with,
he would be willing to pay (our definition of benefits)
for this increase. Similarly, an underemployed retailer
or barber might be willing to pay for the location of
the power plant nearby. Even this sort of underemploy-
ment is not sufficient argument for the inclusion of
these benefits in our net present value calculations for,
in general, there will be similarly underemployed citizens
wherever the plant is located. What is necessary if
there is to b@e a net benefit to,the economy asa whole
arising -out of one of these parochial benefits,is
differentials in underemployment. In an economy such
as ours, it is unlikely that significant differentials
in underemployment can last very long and we feel that
it will rarely be necessary for a body representing the
economy as a whole to spend much time investigating
them.**
However, parochial benefits can be overwhelmingly
important to political bodie-s representing small portions
of the economy. If differences in the geographical
incidence o,f the parochial benefits associated with a
particular investment, whether public or private;
shift these benefits outside of the area the political
body represents, this area suffers a very real loss.
As a result a local community can rationally view
3
a,project -in a very different manner from the region
as a whole, even if no local spillovers are.invo,lved.
What is a wash to the entire economy can be something
for which a locality within that economy may rationally
be willing to pay a high price. Whether a parochial
benefit is a wash or not to a political body will
depend on the range of the responsibility of the poli-
tical body involved. For example, differences 'in the
location of a refinery within Maine will give rise
to differentials in the geographical incidence ' 'of
parochial benefits which will be extremely important
to the communities considered for the location of the

it is ironic that when people talk about the "economic"
benefits of a project, they are almost always referring
to these parochial effects which with the help of
economic analysis we can see are not net benefits at
all to the society, at least in terms of Pareto-efficiency.

-44-

refinery but which will be a wash from the point,
of view of the state of Maine. On the other ' hand, the
decision of whether-or not to build a refinery in
Maine will give rise to parochial benefits.which will
have a net,effect on the Maine economy but which are
washes from the point of view of the country as. a
whole.

It is instructive to note that private markets
and the price mechanism give no weight to parochial
benefits at all and, in the absence of coll ective
goods, spillovers and contracting costs result in a
Pareto-efficient allocation of resources. Parochial
benefits, on the other hand, are a completely arbitrary
concept 'defined by and changing with the boundaries
of the political bodies involved. Given this arbi-
trariness, we should be surprised if the counting of
parochial benefits (however defined) leads to an
efficient allocation of the coastal zone and it is
easy to see that, in general, it will not.

Parochial benefits are the reason why communities
compete with'each other for large private or governmen-
tal installations. A result of such competition is
that.,a developer can use these parochial benefits to
implement projects which are inconsistent with society's
values. -For example, let us assume that society judges
the spillover costs of a coastal power plant so high
that the net present value of the plant located any-
where along the coast is negative. However, the market
situation is such that the plant is profitable to the
developer. Assume further that the coast is controlled
by the local communities. The developer can approach
the local communities and point out that, if we build
the plant in your town, the locale will receive the
bulk of the parochial benefits of the plant. This
localization of the parochial benefits may make it
rational for the town to accept the plant, although
to the society as a whole it is a disbenefit on net.
Furthermore, since towns will compete with each other
for these parochial benefits, the developer can bargain
for the most favorable zoning laws, taxation., etc. In
such bargaining the large-scale developer i's generally
in,a much stronger position than the typical.coastal
town and often can pretty much write his own ticket.
He can even find situations which would be privately
unprofitable in a free market which can become pro-
fitable through this kind of bargaining.* Thus, parochial
benefits can lead to overdevelopment, even in the absence
of any negative spillover.effects.

-45-

In using parochial benefits in t@is manner, the
developer is employing transfer payments from the
entire society to the locale of the development as a
lever. He i's not creating any net values. He is
simply transferring income from one diffuse gPbljp to
a much more localized one.**

Examples of the misallocations that can occur
throughthis mechanism are numerous.

Their are two possible remedies:
1) Ban the formation of political bodies '(formal
and informal) which have the power to.@affect
development decisions, that is return..to a
strictly private market'situation.. This would
prevent the operational expression of parochial
benefits. It would also exacerbate all.the
private market failures outlined earli&r, which
were, at least in part, the reasons for''the
formation of most of these bodies. We do not
consider this an alternative worth cons'idering
in general, although there may be some cases in
'which forbidding political control over certain
types of decisions results in more efficient
allocation of the,coastal zone.

2) Make sure that the political body affecting any
.particular sort of development is broadly based

The Litton Westbank shipyard in Pascagoula, Mississippi
may be a case in point.
Parochial benefits can also arise on the output side
in some coastal zone developments; that Is, some develop-
ments have the property of localizing payments for
the outputs of a development in the same way that
construction and operation,necessarily localizes
payments for the inputs. Recreation facilities are
often of this category. The money people spend
on a recreational activity, say a World's Fair, and
the respending of these expenditures are localized
in the area of that activity for which.locdlization
the community--as opposed to the r'ecreators-@_*-in
question may be willing to pay a great dea '1. This
is the basis for state and local tourist bureaus.
It should be clear that the same argument applies
to thes e benefits as to___p_qrochial benefits arising
on the cost side. In general, they are not,net
benefits to the economy as a whole.

-46-

enough so that the bulk of the parochial benefits
are a wash within its political boundaries. For
decisions concerning the location of a gas station,
the local zoning board is quite cognizant of the
fact that approximately the same employment and taxes
will occur wherever the gas station is located and
will properly concentrate on the spillovers asso-
ciated with the station. For decisions concerning
the location of a large refinery complex, even a
statewide decisionmaking body may not be sufficiently
broadbased to bargain with the developeir on the
basis of outputs rather than inputs. We will return
to this issue in Chapter IV-but 'clearly,accountabi-
lity and responsiveness argue that in any situation,
the decisions should be made by-the smallest political
unit for which the net parochial benefits associated
with this decision are unimportant.

For now, the two basic points with respect to
parochial benefits are:

1) Given full employment 'or evenly distributed under-
employment, the effects of shoreline investments
on the suppliers of the resources enabling these
investments should not be counted in net present
value calculations 'if we are to efficiently allo-
cate the coastal zone.

2) Parochial benefits are benefits on net to the locali-
ties involved, and a political body representing
these localities rationally considers these effects
in representing its constituents. As a result,
decisions emanating from these bodies will not,
in general, be efficient.

Unemployment

if there is widespread unemployment, then the above
statements will have to be altered slightly. Unemploy-,
ment is a situation in which the private market over-
estimates the social cost of labor. Technically, un-
employment is the situation where, at the market wage
rate, the supply of labor is greater,than the demand. In
a perfectly functioning competitive economy, this would
be a temporary situation. The wage rate -would quickly
drop to the rate at which supply would equal demand, which
lower rate we will call the shadow price of labor.

The shadow price of labor will be the point at which
any further decrease in the wage rate will result in the
person's finding employment elsewhere at which alternate
employment his wage is worth the shadow price.,

-47-

rim

In short, the shadow,price of labor is,the social cost
.of labor. If there is a significan't difference between
the market wage rate and the shadow' price of labor
(if there i's substantial unemployment), then the cost-
benefit analyst should use the shadow price. rather than
the wage rate, if we are to allocate resources according
to Pareto-efficiency.

In other words., unemployment should be handled not
by postulating a secondary set of benefits.and
including them in the analysis, but by adjusting the
costs of labor on the project to reflect the social
cost to t.he economy of the employment of saidlabor
on the project being analyzed. Thus, increasing
unemployment will decrease the social costs of labor
which will increase the number of projects which
have positive present value. Certain projects which
were inefticient under full employment will become
efficient',Vith a rise in unemployment. Since the U.S.
economy i,s at sensibly full employment, we do not feel.
that there is-any great need to attempt to develop
shadow prices for labor in evaluating coastal.zone
projects at present, unless,this coastal zone project
intends to makle substantial use of groups which have
much higher-than-average unemployment rates, such as
the ghi@tto poor. No such examples are considered in
the sequel of the report. Therefore, we will value
labor costs at the market rate for the remainder of
this volume.

Uftcertainty
A common demominator of almost all major shoreline U
development alternatives is uncertainty. This is especially
true with respect to the development of biologically
active areas, for the impact of development on the marine
and coastal ecology is very poorly understood. Another
basis of uncertainty which is,at least as important and,
on the basis of past performance, even more likely to be
overlooked arises from the fact that, in order to effect
cost-benefit-analysis, we must predict how people
will value various ecological effects in the future.
Obviously,'we cannot do this with certainty. For example,
it would have taken a prescient individual indeed to
predict in 1940 that the American people would pass
a law in 1966 which showed that they were willing to pay
$3.00 per ton of garbage to reduce the air pollution due
to garbage incineration.

in past economic analyses, uncertainties have been
given lip service at best. This is a crucial oversight
in such areas as conservation, where the costa of guessing
wrong can be high indeed, for many*clevel'opment alternatives
are essentially irreversible. Inthis section, we wish
to argue that means for handling these uncertainties and

-48-

thus trading off the benefits versus risks of different
development alternatives are available, and to point
out some of the practical difficulties involved in the
implementation of these techniques.

For example, consider the possible development of
a marsh. Let us assurf@e for simplicity of exposition
that there are.only two time periods and two possible
outcomes relevant to this problem. Call the times
Now and In the Future. The decision Now is whether
or not to develop the marsh. Whatever we do In the
Future we will become aware of the value of the marsh
and., again for simplicity, we will assume tha-t, with
respect to the value of the undeveloped marsh, there
are only two possible outcomes:

1) In the Future the undeveloped marsh is revealed
to be valuable.

2) In the Future the undeveloped marsh turns out
to be not so valuable.

Let us assume that the present value of the gross
ecological, scenic, and other nonmarket benefits of the
undeveloped marsh in the first case is 15 units, while
in the second case it is 2 units. Let us assume that
the net henefits, exclusive of these nonmarket
values, which will be derived from development NoW and
valued at 12 units and, further, that the present value
of these market benefits, given that we develop
the marsh In the Future, is 8 units. We will also
assume that,once the marsh is developed, the costs of
restoring this marsh are higher than the benefits from
restoration, even if the marsh is shown to be valuable.
This is the typical case and what is usually meant when
people say a development is irreversible.

Given this hypothetical situation, the possible
consequences of our present choice can be illustrated
by the decision tree shown in Figure 2.2. The boxes
in this diagram represent decision points and the circles,
outcomes determined by chance. The break lines indicate
alternatives which we have assumed have been ruled out
by earlier analyses. Thus, the top branch in the tree
indicates that, if we develop Now and the marsh is re-
vealed to be not so valuable-, we will receive the net
market benefits of the development and lose the non-
market benefits of a not-so-valuable marsh for a present
valued gain of twelve and a loss of two, oi@ a final net
present value of ten. Similarly, the net benefits

-49-

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ci
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L-1
tj (D't (D
0 tzj A) P-)
0 (D C@ -C4 @, C. <
@5 .4 @5 (V @l (D
C; (D 91
ct
F-i (D (D
0 .14 .4 (D
(D (D (D (D -e4
-el <4 (D F-i (D
(D (D < 0 H
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CD
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\
CD
-e
(D
F_

of the other combinations of a decision and an outcome
are placed at the ends of their respective branches.
In so doing, we have valued the non-market benefit
of a not-so-valuable marsh between Now and In the
Future At one unit.

Given this situation then, what should we do?
Clearly, that depends on two sets.of judgments:

1) The community's judgment of the likelihood that
the marsh will turn out to be valuable either
because of its ecological properties or because
people in the future decide the scenic and
esthetic values of the marsh are valuable.
The more probable this,outcome, the more attrac-
tive the upper branch becomes. Conversely,
the lower the probability that the marsh is
valuable, the more attractive development
Now becomes-.

2). Even if the community can agree on the likeli-
hood of the various possible valuations of the
marsh, in general it will not be immediately
clear which alternative is most consistent
with the community's set of values. The upper
branch of this tree is the high-risk, high
return alternative. The lower branch assures
us that we will obtain at least three units,
but no more than seven. If the community is
extremely risk-adverse, it may prefer the lower
branch, even if the probabilit_v of the marsh
being not valuable-is quite high. If,
on the other hand, the community is made up
of a set of long-shot gamblers, then, given
the same likelihood, it may rationally choose
the chance at ten units which the upper branch
offers.

With respect to societyis attitudes toward risk., the
usual a,ssumption is that society is risk-neutral;that is,
it is Indifferent between any fair bet. This implies,
for example, that the community is indifferent betwee
an alternative that offers a net present value of $10
with certainty and one that yieldsat 50% chance at
$2 x 106 and a complementary chance at $0. If this
is thecase, the community is said to be an expected
value decisionmaker.

Most peo ple are risk-adverse. Given the above choice,
they would unhesitatingly take the million for sure. In
fact, most people would prefer $800,000 for sure to an
even chance at two million. Most people are 'not expected
value decision-makers and.with good reason.

-51-

However, as the amounts risked become small with
respect to the individual's wealth) most people approach.
expected value decision-making. One of the advantages
viduals
of political @organization is that it enables indi
to share their risks. Thus, from the point of the
economy as a whole, most shoreline development al@
ternatives involve values that are small compared
to the Pegionts wealth, and in these cases expected
value analysis will be appropriate. This may not
be the case if the resources risked are extremely
rare or unique. Expected value analysis with respect
to the Preservation of the bald eagle is almost cer-
tainly not appropriate. In such a case, there is
no. choice but'to attempt to measure societyts attitude
toward the risk in question, either by extrapolation
from other similar situations or by referendum. However,
while marshland is rapidly decreasing, it can hardly
be called rare:or unique. Thus, for the present,-expected
value analysis seems indicated for most shoreline
development projects under uncertainty.

In order to perform expected value analysis, the.
earlier-equation for net present value must be generalized
to the following form:
N Nt Mt
V
Dt Pkt'-Bkt E qkt' CktJ
t@o [k=l k 1

where Nis the number of possible values that the-benefits,
t
rM
may take in year t and M tis the number of possible
values that the costs of the alternative in question
may take on in that year, and Pkt is the probability. of
Uh
the k possible benefit value in'the tth period and
q ' is the probability of the k th cost value in the t th
kt,
period. If the community is an expected value decision-
maker it should choose those alternatives with positive
or, in the case of a set of mutually exclusive,alterna-.
tives, that alternative from this set with the largest positivev
Notice that this is a much different approach@.
than the sometimes suggested idea of:

a) Assuming that the most probable sequence of-event
occurs,
b) Adding a risk factor to the interest rate.

Assuming that the most probable sequence occurs immediately
begs the basic question that different alternatives.may
-52-

have very different abilities to react to the occurrence
of events other than the mQst likely event.* Different
alternatives can have different degrees of flexibility.
Assuming that the most probable sequence of events
occurs completely undervalues this flexibility. In
the sample marsh problem., the basic trade off involved
the fact that, if one did not develop now, it was rela-
tively easy to develop in the future. However, if one
did develop now., then adjusting to the event Marsh
Valuable was prohibitively costly. Assuming that the
most probable sequence of events occurs ignores this
basic consideration entirely.

Moreover, the idea of assuming a sequence of events
and adding. a risk factor to the interest rate is not
only an extremely poor substitute for actually tackling
the fact of uncertainty, but also once one has so
attacked the problem and assumed that the community
is an expected value decisionmaker, it is inconsistent.
Even if one is risk-adverse, the addition of a risk
factor has no solid foundation. Methods for handling
this problem are given in reference (19) . The use
of a risk factqr grew out of the perfectly reasonable
practice of banks demanding a higher interest rate on
risky loans. If one does an expected value analysis
and ass-umes that the banks want to make the same amount
of money on the average from all their loans, a necessary
condition for the bank to be an expected profit maximizer.,
then it will be clear that they have to raise the price
of their commodity on risky loans for the expected re-
payment, as oppos(@d to the nominal value of the loan, on
a high risk loan is lower than the expected repayment
on a low risk loan. The change in interest rate is a
product of the ana-ysis of uncertainty, not a substitute
for-it.

We are now in a position to comment in more detail
on the argument that the nominal rate of return on risky
investments should be used as the interest rate in present
value determinations.,rather than the risk-free rate of
return.

Fir st of all, Baumol's argument that the nominal rate
of return should be used is inconsistent with his recommenda-
tion of using the weighted average of the rates
Usually, the most likely chain of events is itself
a very low probability set of occurrances.

-53-

of return in the sectors from which the project's
resources are drawn for, if we find one investment
obtaining a return of 20% in a particular risk envi-
ronment, then elsewhere in that same environment we
will, with high Probability, find investors obtaining
less than average or even negative returns. If not,
capital would flow to the area with the average higher-
than-average rate of return. (Of course, companies
often attempt to use risk as justification of high
profits resulting from monopolistic positions or
beneficial taxation policies when no such risk exists
in fact.)

Secondly, the argument that individual risk is
different from social risk appears to be based on a
misinterpretation of the law of large numbers. If
one makes a large number of risky decisions, the law
of large numbers does not assure one that, with the
high probability, the final gain (loss) will be close
to the expectted gain (loss). In fact, the
probability of getting further and further away from
the expected outcome increases with number of invest-
ments. The law of large numbers rather says that the
average gain (loss) per investment will, with high
probability, be close to the expected gain (loss)
per investment, which is something quite different.
It is not the law of large numbers alone that assures
the profitability of an insurance company but the law
of large numbers, combined with the risk aversion of
its clients, which makes themw illing to pay a premium
(given the insurance company a bet with positive ex-
pected value) in order to avoid certain situations with
large personal losses. If people were only willing
to make fair bets with insurance companies (bets with
0 expected value), sooner or later the insurance company,
however large, will be ruined. From this point of view,
it is not clear at all that society shouldn't be willing
to pay something to avoid risks.

However, we would be the first to admit that in many
situations society can afford to be an expected value
decision-maker when the individual cannot, in which case
the society should use the expected return on a risky
Investment in calculating its opportunity cost while an
individual might evaluate the return at something lower
when comparing it with a riskfree investment. For society,
like our insurance company, has a large number of positive
expected-value investments each of which are small compared
to the assets of society as a whole. And, in fact, we shall
use expected value analysis in the sequel.

-54-

However, there is a broader sense in which society
is not in the happy position of our hypothetical insurance
oompany--oituations in which a good deal of social
riskadversion might be prudent, situations in which
the@Andividuals of the society as a whole might be
willl@h-'g-to-pay a great,*deal for insurance.. Many eco-
logists.have pointed out that we have attained the
ability to produce large scale changes in our environ-
ment with consequences we are as yet unable to predict.
Not all the bets that we can make with our environment
are still small compared with our total assets. Odum,
among others, has emphasized that those ecosystems
which maximize productive efficiency under a-porticular
set of circumstances--monocultures based on
grazing food chains (plant-hervivore-carnivore,,sequences)
rather than reuse of detritus--are just those ecosystems
which are most vulnerable to exogenous changes in the
environment.(20) In short ' generally the most efficient
systems are the ones which offer us the least protection
to biological perturbations. The question then is how
much are we willing to pay for stability in the face
of unce.-tainties about the consequences of our actions?
We will not go into this problem in this report but
merely no"L-1-e that,if some of the possible consequences
are 6f world-scale or even area wide magnitude, ex-@-
pIected value analysis is probably inconsistent with
U.he desires of a society make up of risk adverse in-
dividuals.

A useful analogy may be made with the actions of
insurance companies with respect to hurricanes. Meaning-
ful hurricane insurance cannot be purchased in such
areas as the Florida Keys even though a large-number
of potential insurers are willing to give the companies
clearly positive expected value bets. For the com-
panies. realize that if the unlikely event of a much
higher than expected frequency of hurricanes occurs,
then losses will not be small compared with their assets.*
Society might also be unwilling to take such bets. Thus,
hurricane-protection projects with negative expected
present value may be consistent with willingness-to-pay.
In summary, the restrictions on expect 'ed value analysis
should be kept in mind in all that follows. Expected
value analysis should not be accepted as uncritically
as it has been in the few economic analyses which do
exist which have attempted to include uncertainty in. their
Tt should be noted that the independenc e requirement
of the law of large numbers is violated.in this case.
It can also be violated with respect to society,in
general. For example, consider insurance (deterrence
assuming deterrencle is effective), against w-ar.

-55-

analysis in a meaningful way.

The Problem of Finding Societyfs Probabilities
Given that one is prepared to assume that,, in the
situation under analysis, society is an expected value
decisionmaker, then or@e is still faced with the problem
of coming up with society's probabilities on the
possible consequences which can emanate from each
alternative. If the community were an individual, this
would,be.no great hurdle. in the hypothetical marsh
example given above, one would simply ask the relevant
individual whether lie would prefer a 50/50 chance at
$1,000 or a lottery ticket which gave him $1,0.00 if
the marsh were valuable. If he prefers the former, that
individualfsl.@subjective probability on the marsh being
valuable is less than one-half. One might then ask
-this individual whether he would prefer a 25% chance
-tery ticket, and.so on,
At $1,000 or the marshlot
unti,l one obtained the point where the individual.was
indifferent between x% chance at $1,000 and the $1,000
if the marsh is valuable. If one accepts a very small
set of intuitively appealing axioms about rational
behavior under uncertainty (see reference 21 ), X
is this person's probability that the marsh will be
valuable. in general, of course, there will be many
more than two possible outcomes relevant to a shore-
line development. In fact, there will often be a'
continuum of Possible outcomes, but this method can
be extended to these cases with no conceptual difficulties.

-The problem rather is specifying a-probability
distribution-over the relevant outcomes for a-community.
Given our interrrogation method, one citizen can have
an entirely different sell- of probabilities over the
same set of outcomes than another citizen.. In'the
vernacular, this is what makes a horse race.

At present , there lids been no satisfactory analyti-
cal attack on the lDroblem of -ow-munal probability distri-
butions. The best-,advice that can be given now is that
the community approach an expert or group of eXDerts on,
say, marsh value and ask them to come up with the possible
outcomes and relevant probabilities of these outcomes.
This approach has been Successfully followed in a number
of industry problems. in practice, one findsthat the
experts will start out with somewhat differing probability
distributions on the random variables in question, but,,

-56-

if they are allowed to communicate,, they will reach a
distribution they can all agree upon. If not., the
community or its representative must weight the differing
opinions and generate a distribution in this manner.

As inelegant as this meth.od is, it is in our opinion
far superior to the usual alternatives of:

a) Ignoring uncertainty and proceeding with cost-
benefit analysis as outlined above. This can
lead to gravely inefficient allocations of the
shoreline.

b) In the face 0 f uncertainty, throwing up one's
hands and turning the allocation problem back
to the market.

In the exemplary problem in Chapter 3, we will attempt
to substantiate this viewpoint.

Budget Constraints

Ideally, investment projects (public and private)
will be undertaken in such a way that the real (money
plus non-monetary benefits) rate of return on each
project is equal to the society's opportunity cost of
capital. Often in government agencies there may be
certain budget restraints imposed even though the
real rate of return on,some government projects exceeds
the economy's opportunity cost of capital. There just
may not be enough budgetary resources of a certain
agency to undertake all of the investment projects that
ought to be undertaken by the agency.

In this second-best situation a method must be
found to find an efficient allocation system,,given the
artificialbudget, constraint. Benefit-cost analysis can
still be used but it must be modified. The opportunity
cost of capital is higher for that agency than for the
society. (This implies its budget should be increased.)
In order to pick from its alternatives, given this budget
constraint, the agency should increase its interest rate
until it finds that set of projccts with positive net
present value, given this increased interest rate, which
just use up the amount of available money.

-57-

Proceeding in this way, the agency can make efficient
use of the resources, given that he faces budgetary con-
straints and it is not able to invest to achieve social
balance.

Thus, in coastal al.@ocation decisions it may be
impossible to undertake public projects that provide
the most efficient use for a particular site, due to
budgetary constraints. In this case, estimates must
be made of when 'the public project could be undertaken
and the benefits of the project discounted accordingly.
If the project is delayed far into the future, other
projects will,of course, become the most efficient use
for the site, even though they do not. have the highest
net present v alue given the social interest rate.

Conv--rsely,.,,, if an agency finds that, at society's
opportunity cost of capital, it does not have enough
projects within.its charter with positive present values
to use up its budget, then it should not use all the,
resour-oes it has heen alloted and return the excess
budget to the public coffers to be used elsewhere.
Of course, we are not naive enough to believe that this
is what happens under the present set-up, but the princi-
ple still stands and does point toward certain institu-
tional improvements.

Cost-Benefit Ratios

Several authorities (13), (14) have demonstrated
that the practi,ce commonly used in the past of dividing
the gross present value benefits by the gross present
value costs and ranking alternatives according to the
value of this ratio can be inconsistent with Pareto-
efficiency, that is, inconsistent with willingness to
pay. Given mutually exclusive investments, cost benefit
ratios can pick less highly-valued projects over more
highly valued., will often pick a less-than-optimal scale
of a given project, and are subject to important ambi-
guities. Even the argument that net pr-esent value ignores
risks associated with scale is no longer applicable, if
we incorporate uncertainty into the analysis expl icitly
as outlined above. We regard the disadvantages of cost-
benefit ratios as conclusively demonstrated and will make
no further reference to the concept in this report.

A Final Caveat

This chapter has dwelt in considerable detail on
the imperfections of the private market with respect to
Pareto-efficiency or individual willingness-to-pay as a
social goal. However, to say that the private market does

-58-

not yield efficient results in all instances is not
to say that it should be ignored or eliminated. Typically.,
any analysip.,,W111 start with the results which would be
produced in'the private market. These results need to
be modified in many cas@s,, but they are almost always
the correct place to start. If the results do need
to be modified, the government is faced with two options--
undertake projects directly, or try to modify private
market decisions so that they are in accordance with
social benefit-cost-calculations. Often, this means
changing the structure of the market either institu-
tionally (public corporations, for example), or providing
tax or expenditure subsidies which lead private decision-
makers to choose projects which are Pareto-efficient.
There is no general rule to determining which of these
methods should be used.

The choice of methods is in itself a decision that
can sometimes be analyzed from the point of view of
benefit-cost analysis. Typically, society will want
to use the method which generates the desired social
benefits at the least cost. Sometimes this will be
direct government expenditure, sometimes a public
corporation, sometimes tax incentives, and sometimes
expenditure subsidies.

_59-

dHAPTER I

EXEMPLARY COST-BENEFIT ANALYSIS

Introduction

For our exerrplary 13!roblem, we have. chosen to analyze the
desirability of"developing one of the Boston Harbor islands, Lovell
Island,, for waterfront recreation. Since this exanple is presented!
as a means of illustrating the practical problem involved in.cost-
benefit analysis rather than to determine the desirability of the
actual investment, we will make free use of assunptions and hypo-
theses, especially in developing our cost data. In an actual imple-
rmntation, such assurrptions would have to be validated by'detailed
costing,procedures. Three other exa@Tples of-coastal zone.problems
which we believe:are amenable to varying degrees of cost"benefit-
analyses, are considered in considerably less detail in Appendices A,
B, and C.

In Appendix A the possibilities for expanding the -recreational
use of a beach in a coastal conyflunity south of Boston are examined,
while"-Appendices B*and C examine nonrecreational uses of'the coastal
area. The particular cases chosen ar@-_: 1) an ana-lysis of the-bene-
fits and costs-associated with,a shoreline location for a nuclear
,reactor power plant now under construction near Plymouth, Massachu-
setts,, and 2) an examination of the costs and,benefits associated
with various strategies that might be followed for handling the oil
demands of New,-England.

Once again these examples are provided not for the purpose of
arriving at definitive recorrnendations related to the specific
projects, but to illustrate-methods for approaching corrplex public
investment problems.

The general layout of Boston Harbor is shown in Figure 3.1.
rihis body of water comprises about 47 square miles in surface area,
containing thirty islands. These islands have a combined area of
1152 acres. Almost all this land is within six miles of the central
business district of Boston and the bulk of it is within three miles.(22

Despite this proximity and the islands' scenic attractiveness,
this land has never served the major metropolitan needs of the region.
The comaunity's-practice, rather, has been to use the islands, if at
all, to remove various types of social unpleasantnesses from the
mainland. Deer Island is used for a prison anda waste disposal
plant. Long Island houses a hospital for the chronically*ill.
Spectacle Island houses a smoldering duiTp. With a few exceptions,
the rest.of the islands have been unutilized, since the.decormiissioning

-60-

JBOSTON.', LOGAN A!F-)r'OmT

Deer Island
U,
BOSTON

t HARBOR Lovell
Island

Gallups'l-
Long Island Georges Island
Island

..........
Pemberton ALLERTON

..........

QUINCY :......... HINGIIAM HULL

NANTASKET
BA Y
I- ** BEACH
BA Y

. .........

QUINCY

HINGHAM CEN.

RANDOLPH -qOLJTH WEVNIOI)TH

FIGURE 31 THE BOSTON HARBOR AREA
...............
.%A

of Ahe harbor forts.*

The rising demand on space in the Boston area plus the fact
that, for a variety of historical reasons, much of the harbor land
is in the hands of various public agencies has generated a number
of proposals for developmept of the islands. These include acquisi-
tion of all the harbor islands and their dedication to recreation
and conservation, construction of a model city in combination with
a Worldts Fair, development of a jetport on the outer islands,
filling and industrial development, and use of portions of the
harbor for educational facilities. Since we are going to.study
only one of the myriad possible uses of one of the thirty harbor
islands, the results or our analyses are at best provisional. We
will be able to make a statement whether such a development is
better than leaving Lovell as it is. However, we will not be able
to determine whether this is the.best of all possible uses of this
island. In order to do this, it would be necessax-y to similarly
analyze a representative spectrum of the other possible ways of
employing this resource, such as housing, port facilities, et cetera.
However, this limited analysis will serve our basic purpose of
indicating some of the practical problem with respect to cost-
benefit analysis.

*This is not to imply that the harbor itself is unutilized. Approxi-
mately twenty million tons of cargo, 80% of which is petroleum prod-
ucts., are handled through the harbor annually. The harbor serves as
the terminus of the Metropolitan District Comassion sewage system.
This system, s'erving over two million people, discharges four hundred
and sixty million gallons of partially treated sewage daily into the
harbor from the combined sewer system. Building wastes are burned
just outside the harbor on barges. Much of the airspace-and a large
portion of the northern part of the harbor is used by Logan AilTort
implying, among other things, that a good deal of the harbor is
subject to intermittent intervals of high noise levels. Development
along the mainland shores is quite dense, although much of this
development takes no advantage of the shoreside location. The harbor
is utilized by some 11,000 bathers on a summer weekend day and is the
home of at least 5,000 pleasure boats. The harbor at one time was
an important source of fish and shellfish, but currently@less than
1% of the fish landed at Boston are taken from the harbor and less
than 10,000 bushels of shellfish are taken aftnually (23 ). Half
of the harbor's shellfish grounds have been closed,and shellfish
from half the remainder have to be treated before they can be sold.
Under the prevailing winds, the harbor's atmosphere is generally used
first by the region's transportation, heating, and power generation
system .

-62-

THE OUTDOOR RECREATIONAL SITUATION AS IT RELATES TO THE
HARBOR ISLANDS

Before proceeding to the analysis itself, it will be
useful to review the general demand for water-related out-
door re.creation in- the Boston metropolitan region.

Despite New England's relatively cold weather and
even colder waters, New Englanders presently'lead the
nation in per capita p,@rticipation in water-related
outdoor recreation. The 1965 National Survey of Outdoor
Recreation conducted by the Bureau of Outdoor Recreation
indicated that the average New Englander participated
in .62 days of sailing in 1965 to .16 for the average
American, 2.71 days of motor boating to 1.56, 3.11
days of ocean swimming to 1.58 (total all forms of
swimming was: New Englander, 11-53; American, 6.84)
and .75 days of waterskiing, to .42 for the country
as a whole (24). Finally, the average New Englander
enjoyed 3.05 days of fishing to 2.26 for the country
as a whole (24). These differences reflect the availa-
bility of a long and unusually attractive shoreline, the
average New Englander's better-than-average income,
education, and high degree of urbanization plus perhaps
a long heritage of communication with the sea.

These figures, of course, refer to the amount of
demand for these forms of recreation actually realized,
given the present supply of recreational facilities,
the present transportation system, and present income
and leisure-time distributions. Ideally for our @ur-
pose we need to know much more: the maximum amount
people would pay for a particular recreational activity
as a function of income,leisure time, quality of the
recreation, et cetera, rather than a single point on
this surface.

The National Survey also tabulates days'.participation
in each activity as a function of income from which we
can obtain a preliminary estimate of the income elasticity
of the demand for these sports. This data is shown in
Table III.1 along with the corresponding arc elasticities.
The average elasticity for each of the three sports
for.which sufficient data was available are all about .5,
indicating that a 1% increase in income will tend to
produce 1/2 % increase in per capita participation. Com-
parisons of the 1960 ORRRC figures (25) with the 1965
data indicate that rates of participation by income
groups were relatively stable, perhaps because increased
leisure was balanced by a drop in real earnings since
the data is in current dollars, or perhaps because the
supply of recreation decreased either in quality or
ease of access.

There is one other piece of information we need before
we can begin -to construct the demand for outdoor recreation
relevant to Boston Harbor and that is the split between recreation
undertaken "away from Home"(on overnight or long&r trips and that
-63-

consumed at home (on trips of a day or less).

ORRRC #19obtains the following percentages on the amount of
recreation consumed on trips of'a day or less versus that consumed
11away" on overnight trips for each of the water-related sports 26).

Home Away

Boating .46 .52
Waterskiing .50 .50
Fishing .38 .62
.Ca'rrping 0 1.00
Swimming .55 .45

That is, roUgftlly half the water-related recreation is consumed on
day.trips. Ti'is is the market at which arecreational development
in the Harbor would be aimed.

Dividing the New England participation rates on page 63 by
t
'to refle@ct this split and using the Arthur D. Little projection
wo,
of real income@ for New England we obtain the following projections
of.per capit6i,participation rates in water-related, day trip, outdoor
recreation1f6r the next 30 year-, (27

1965 1980 @2000

Ocean swimming 1.65 2.56 3.48
powei@ boating 1.35 2.10 2.84
Sailing .3 .48 .65
Waterskiing .38 .59 .61

This table assumes that the per capita supply of recreation remains
unchanged. It is only one point on the demand curve. If the quantity
and quality of recreation deteriorate or it, becomes more expensive
in real term to enjoy this recreation, then the amount of recrea-
tional. activity will, of course, decrease. If, on the other hand,
more and better or cheaper recreational opportunities are supplied,
then the,participation rate will increase.

The:harbor serves as the focal point for a region containing
some two-and-one-half million people. According1to the ADL projec-
tions,-by 1980 the population of this ared will increase to about
'llion in 1080 and 4.4 million in 2000 ( 2 8
mi Of course, this
population is served by marine recreational facilities other than
the-harbor,., The harbor is flanked on both the north and south by

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shoreline containing large attractive beaches, principally
Lynn and Revere Beach on the north and NantAsket on the
south. Further, other beach areas are within day-trip
distance of the metropolitan region, including Duxbury,
Plymouth, and western Cape Cod on the south; the Cape
Ann beaches, Plum Island and Hampton Beach to the north.
However, the first set of beaches, those within an
hour's drive of the CBD are presently used to capacity
on a summer weekend day and the latter set imply large
travel costs for the one-and-a-half million residents
of Boston Proper and the close-in cities of Cambridge,
Brookline, Somerville., Malden and Everett. Therefore,
it appears reasonable to assume that, if beach facili-
ties comparable to those presently available could be
supplied in the harbor at approximately the same total
cost to the consumer, these facilities could expect
to attract almost all the increase in demand for day
trip ocean swimming arising in this close-in region.
This increase amounts to 1.3 million swimmer days by
1980 and 4.2 million swimmer days by 2000, according
to our projections.

The Massachusetts Outdoor Recreation Plan has made
studies of the use of the Greater Boston-beacbes and
concludes that, on the basis of a 90-day season, 2.2%
of the use occurs on the average summer day.(29) Com-
bining this with the above figures indicates that, given
recreational qualities and access and use.costs similar
to those presently available, one could expect 30,000
bathers on a typical summer weekend day in 1980 and
90,000 in 2000. At the B.O.R.'s suggested standard
of 75 square feet per person, this demand could be
handled by two miles of beaches in 1980 and six miles
in 2000.

THE AMOUNT PEOPLE ARE WILLING TO,PAY FOR A DAY AT THE BEACH

The above section is a typical example of a classical,
if very roughhewn, projection. One assumes that the supply
situation will be similar to that existing at present;
measures the present per capital consumption by income
group; obtains estimates of future population broken down
by income distribution and, in more extensive studies, by
education, leisure time, vocation" etc.; and applies the
present consumption rates to these figures. Such analysis
is useful for obtaining a feel for the magnitude of the
demand, but it can hardly be called a determination of
the demand, which-determination involves how people will
react in a number of supply situati'ons. The purpose of
this section is to review the present state of the art
with respect to determination of the demand curves for,
recreation and, in particular, the determination of how
.much people are willing to pay for a day of outdoor recreation.

Three met hods for measuring the amount people would be willing
to pay for outdoor recreation have been suggested in the literature.
-65-

The earliest isthat by Hotelling who assuffes that all people
value a visit to, a, particular recreation spot'the same ( 30). One
then discovers (by, say, license plate survey) the total cost (time
and travel) to the visitor who travels the farthest. Presumably
he is the marginal user and the swn of the differences between
the cost and the travel costs of each of the other visitors@is the
net benefit of this activity.

The difficulty here is that all people will not be willing to
pay the same amount for a visit to the spot and, more-importantly,
one can be sure that the traveler who pays the most for a visit
will have a far-above-average value. Nonetheless, the idea;is not
completely without merit. For exalTple, one could determine the
origins of the !distribution of travelers, pick some intermediate,
11representative." trip cost and asswrie it is the marginal one,
ignoring all those travelers who have a higher trip cost and
assuming that aX-1,those having lower costs place the same va-lue on
the visit as the@arbitrarily chosen marginal traveler. This would
at least lead to,a consistent comparator of the attractiveness of
alternate recreation spots.

For example,,. in the summer of 1965 the r@ketropolitan Area
Planning Counoil,(MAPC) conducted a 5,000 plate license survey of
five major beaches in the metropolitan Boston area (31 ). At present
we do not have the actual data, but the MAPC reports the following
frequ'ency distribution of trip times for these cars.-

PERCENT"CARS AS A FUNCTION OF TRAVEL TIME
DRIVING TIIYE IN MINUTES

0-10 11-20 21-30 31-4o 41-50 51-6b 61-70 71-8o

Nantasket 6 11 14 19 23 13 11 3
Wollaston 41 30 16 8 4 - - -
Carson-Pleasure 11 37 21 8 2 .1
Revere 24 30 22 11 8 3 1 1
Lynn 1 20 49 20 4 4 3 1

It is the absolute number, not percentages, that we need for the
Hotelling analysis, but, for now, assun-ke we rank the beaches according
to the percentage of trips over 40 minutes.

Nantasket 50%
Revere J-Dof
3/0
Lynn.. 10%
Wollaston 5%
Carson-Pl6asure 4%

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With the possible interchange of Lynn and Revere (Lynn
has severe parking problems), this is a ranking which
the authors believe would receive a lot of support from
beach-goers familiar.with all five. In sum, a modified
Hotelling procedure could prove useful.

The second method is that suggested by Clawson-
Knetsch (32). This also starts from travel cost data.
Suppose there are three population centers which visit
a particular beach, A, B, C, as follows:

Pop. Travel cost of Visit Visit observed Visits/1000

A 10,000 $3 10,000 10

B 41-0,000 $4 10,000 5

C 10,000 $5 2,500 2.5
@2,500

No one having a cost of $6 is observed to use this beach.
Plot participation rate versus cost as shown in Figure 3.2.

Now we want to know what the demand would be if we
raise the cost x dollars. x = 0 we already know, 22,500.
But if x = 13 the observed cost for A would be 4; for
B, 5; for C, 6. The resulting participation rates
would be 5,2.53 and 0, respectively, and the total demand
realized would be 5 x 10 + 2.5 x 20 + 0 *x 10 = 10,000. This,
assumes each group reacts to price in the same manner. Con-
tinuing in this manner for increasing x, we obtain the de-
mand curve shown in Figure 3.3. Knetsch interprets the area
under this curve to be the consumers' surplus or net benefit
of the activity. This assumes not only that each group has
the same value on visits (which is much less restrictive than
the Hotelling assumption of equality of values for each per-
son as before), but also,that the consumers' surplus for
everybody at x = 0 is zero, which is certainly conservative
and, in fact, a lower bound. ThuS3 by combining.both the
Clawson Knetsch method and the Hotelling@method, we
can bound the aggregate Value of the activity. It might
not be unreasonable to base investment decisions on the
average of the two. Or, if one were willing to assume that
the demand curve was convex,,, this average would form a new
upper bound. Anyway, values obtained by both methods would
be of interest. Knetsch notes that the assumption that each
cost group places the same value on the visit can be relaxed
considerably by dividing the visitor population

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-Opt-3

_;O

FIG 3.2 Parti-cipation Rate (Visits Per Thousand.Population)

PL4

Cf)

t. '4 6 ;0 1,2 1,04 1 6 1@8 20 22

FIG
.3.3 Demand In Thousands of,Vi,sits

-68-

not only by,travel costs, but also by income and other socioeconomic
characteristics and then making the standard assumption that each
subpopulation places the same value on the visit. This observation
applies equally well to the Hotelling method and thus, through it,
we could obtain increasingly narrower bounds on the aggregate value
at considerable expense in data collection and reduction.*

Mack and V@yers express considerable doubt as to the possibility
of determining the aggregate value of a recreation activity and
suggest rather the concept of merit-weighted users' days ( 33)-
This latter is a distributional measure which has no relation to
individual values as used in this report. As such, it is useful
only in choosing between alternate recreation investments of about
the same social cost. The merit refers to. a means for consis-
tently irrplementing distributional judgments rather than to the
quality of the recreation. However, they do discuss in some detail
dollar values derived by combining national data on total dollar
expenditures on outdoor recreation with the total hours spent in
outdoor recreation in several ways. All these calculations lead
to the fact that, in 1960, people spent an average of approximately
$2.50/day (1960 dollars) on outdoor recreation. Obviously, on the
average, the value they placed on this recreation must have been
higher. Thus,ithis figure serves as a quickly-arrived-at lower bound
on the average amount people are willing to pay for recreation. It
would-be useful to subdivide the aggregate data by type of outdoor
recreAtion and by socioeconomic characteristics of the population
in the same manner as above to derive lower bound on the average@
amount each subpopulation is willing to pay for each activity.,
Joint activities would undoubtedly cause difficult problem with this
approach.

We have followed up none.of these approaches. Rather consis-
tent with our comments in Chapter Il we will calculate the net
present value gross benefits of our recreational facility for a range
of user va-lues, leaving to the political process the final coiTparison.
However, we hope that the above discussion indicates that. with some
thought and ingenuity it should be possible to at least estimate
the amount that various population groups would be willing to pay for
a recreational experience.

INCREASE IN REAL BENEFITS WITH TIME

Given that we have chosen a particular individual user benefit
for a day at the beach, say, $2.50 1960 dollars, we will need a means
of escalating this value through the next 40 years to reflect the
projected increase in the real amunts that people are willing to

*The fineness of such subdivision would be limited by available data.

-69-

pay for a particular recreation activity as a,result of
. .1
increases in :i@eal income further urbanization,.more
leisure tim"6 et cetera. For our purposes, we will base
our projected increase solely on income.
Clawson and Knetsch in reference (34) indi.cate
that the percentage of disposable income spent on out-
door recreation has been rising irregularly atan average
rate of .1%-Iper decade over the last,25 years. It is
presently about .7%. In v-lew of this data, it would
certainly be.,conservative to assume that the demand
for recre ation will increase only pmportionately with
real income. Toi has extrapolated this to predict
that, by the year 2000, people will be spending 2%
of their di@gposable income on outdoor recreatibn (35).
Kahn ai`n'@d Wiener predict that the real per' capita
income will rise according to the following schedule
through the next 40 years (36);

1565 1971 1975 1985 2boO 2020

1.00 1.16 1.2@6 1.65 2.56 4.4o

and these'ar'e the figures we will use in etcalai@ing the
base gross,.@per capita benefit in the followinkanalyses.

THE COSTS OF A PARTICULAR RECREATIONAL DEVELOPMENT IN THE
OUTER HARBOR

As noted earlier, we are not going to attempt
to analyze,'all possible recreational developments of the-
Boston@Harbor islands. Rather, we are going to,postulate
a parti cular development and apply cost-benefit-analysis
to the single alternative. The particular alternative
we have in mind concerns Lovell Island, well out in the

*This fact 'together with our earlier observation-that days"
participation increases only half as fast as in'come indicates
that as income increases the increased expenditure is spent
J-1 eq ually on more recreation and on increased quality-of
recreation.

-70-

harbor. Lovell contains some 56 acres and has about 4,000
feet of shoreline facing the ocean. At present, there are
no beaches on Lovell., but the ocean side consists of tidal
flats on which we postulate filling and protection to pro-
vide 25 acres of beach. The littoral drift along this
.coast is southward. Therefore, we postulate a large groin
-projecting from the island's southern end with a triangular
fill in the corner formed by the groin and the island.
There are no beachs or even any shoreline downstream from
the groin so there are no downstream areas which are likely
to be affected by the groin.. We also hypothesize the pro-
vision of picnic grounds and open areas for picnic-re-
lated sports on the island proper. We postulate sanitary
facilities, a transportation system, and sanitary facilities
such that, at peak density, the development will be operating.
at 75 square feet of beach per person and 130 persons
per acre. These are the standards recommended by the
Massachusetts Outdoor Recreation Plan. It should be noted
that they are considerably more generous than the standards
at peak use of the present urban beaches. 'Thus, we are
considering a relatively high quality of recreation. Given
t-liese standards, our proposed development can accommodate
about 14,,000.people. Comparing this figure with,the'esti-
mated projections of excess demand for urban beach recrea-
-,ion, we note that even at peak operating capacity this
facil'Ity Will not come"close to saturating the market. The
purpose of this section is to estimate the value of the
resources which will have to be emplo*yed to develop andluse
this recreational facility. These costs can be divided
into four categories:

The opportunity cost of the land;
The cost of providing and maintaining the physical
facilities;
The cost of providing access from the mainland;
The,cost of getting to the mainland terminus of the
mainland-to-island link.

THE OPPORTUNITY COST OF THE LAND

This land is already in the hands of the Metropolitan
District Commission. Hence, its employment as a recreational
facility by the public involves no financial costs to the
public. This does.not imply that the land is a free resource
j.or,,, if the community opts to develop this land as a recrea-
tional facility, it cannot use the land in some other use,
and the 'Cost of this employment is the value of the land in
its most valuable alternative use. Given that there is no
convenient access, it appears that the opportunity cost of
the land is quite low. However, given that we provide access to
the island, as we intend to, then the land may have substantial
,value for, say, a.high-rise residential development. However,
without simultaneously analyzing these other alternatives, we
cannot say what this value is. Therefore, we are going to take the

-71-

opportunity cost of the land to be zero, its approximate value
in-its present use, with the caveat that such an assumption
limits us to comparisons between the present use and the use,
which we are analyzing. Actually, if one analyzes all
possible alternatives using the assumption that the land
"had an opportunity cost-of zero, the resulting rankings would
be correct as long as one uses the maximum net present value
criteria. This is not necessarily true if one uses maximum
benefit/cost ratio.

FILLING AND BEACH PROTECTION

With respect to provision and protection of the beach and
provision of physical facilities on the island, market costs
offer a reasonably reliable indicator of true costs to the
community. The market cost may overstate the opportunity
cost due to monopolistic positions in certain portions of
the labor market; however,, this is unlikely to be significant.

The mean*tide in Boston is about nine feet. In order
to develop twenty-five acres of beach from the present
tidal flats will require about 500,000 cubic yards of fill.
The present market cost of fill in place in Boston Harbor
is about $2.00 per cubic yard. In addition, we will require
a large groin, about 250 yards long, at the southern end
of the beach. In the absence of more detailed costing,
we will estimate the costs of the construction of this
groin at 50% the cost of the fill. Thus, the initial costs
associated with provision of the beach is $1,500,000. We
will assume that we will lose 10% of the Pill per year
and thus the cost of maintaining the beach is estimated
to be tIO0,000 annually. The present value of this stream
of costs for 40 years at 5% is $3,400,000. In an actual
analysis, the design of the beach and its protection and
the expected loss per year should be the subject of intensive
hydrologic studies on which these costs would depend.

COST OF PHYSICAL FACILITIES

Analysis of facilities at present beaches in the area
indicates that it requires about 1.6 square feet of bathhouses
and rest rooms to support a bather. We will assume that any food
stands or snack bars are run on a self-supporting basis and that
the users figure that the marginal value of the items purchased is
equal to the resulting price. Hence, we need not consider these.
facilities within our calculus. Thus, for our purposes we will
,require about 225000 square feet of test rooms and bathhouses.
We also intend to provide picnic facilities at a density of 12
locations per acre or 600 picnic sites. We estimate the cost of
the covered facilities at $24 per@square foot and the cost of the
picnic sites at $1500 apiece where costs are taken to inc'lude paths,

-72-

landscaping, fireplaces, and open shelters capable of handling
25 people apiece ( 37). The costs of lightin and electrical
distribution are taken to be $500 per acre M ). In summary, our
rough estimates of the initial and annual costs of the physical
facilities are:

Annual
Initial (Estimated)

Rest rooms, bathhouses $ 530,000 $ 50io0o
Picnic sites, landscaping,
shelters 9003000 50,000
Lighting 25,000 5,000
1,1155,000 105,000
Presentmalue of cost
for 40 years at 5% $3,495,000

MAINLAND TO ISLAND TRANSPORIATION SUBSYSaEM

The costs of providing access to the facility are properly
imputed to its -use. Once again the cost-, that we are interested in
are the marginal costs associated with the facility. If a presently
available resource can be utilized in providing this transportation,
it is the additional costs associated with this use that we are
offered. The past construction costs, etc., are irrelevant to our
analysis.

In this section we consi der the costs of providing transporta-
tion from the mainland to the island. In the following section, we
will consider the costs of transportation from the home to the
mainland terminus of the island transportation system.

For our purposes, we will postulate the following design
criteria for the mainland-to-island transportation system: this
system shall be capable of transporting 14,000 people from the Boston
waterfront to Lovell in four and a half hours in the morning and
returning them in the same amount of time in the afternoon. In an
actual analysis., the determination of these criteria would in itself
be the subject of a subsidiary cost-benefit analysis, for the demand
will depend in paxt on the.level of service offered. For now, we
will accept this particular level of service.

In order to perform this function, we have analyzed two possible
ferries.

TABLE I I 1. 2

Djpical Ferr-y Boat Data (39)

Daily
Dimnsions dir.
length- First opert.
bear@- Displacement Speed Passgr cost cost Crew
draft- tons knots -No. $1000 $ No.

1 50xl2x5 57 12 100 100 200 3
2 100x20x7 260 12 600 46o 600 10

The one-way distance from Rowes Wharf in downtown Boston to Lovell
is six nautical miles. Allowing ten minutes at each end of the
trip to load and unload5 the round-trip time for each of these
vessels would be 70 minutes. In four and one-half hours, each
vessel could make four trips. Thus, our criteria would require
35 of the 100 passenger vessels and six of the 600 passenger ferries.
The economies of the large ship are obvious; therefore, we will
consider only thisdesipp in the sequel. Of course, in an actual
study a conpletp parametric analysis of all possible vessels, including
hydrofoil and ground effect machines should be undertaken to determine,
theminimum cost system capable of performing the selected function.
Such mbstudies would feed back an the selection of the level of
service criteria as it becanie clear what each level of service would
cost.

Given that we employ vessel #2 and we assume this ship has a
useful life of 20 years, we will have the following set of costs:

INITTAL COSTS

Six ferries $2,750,000
Slip and jetty at Lovell 6o.,000
(Opportunity cost of using Rowes Wharf is essentially zero.)

ANN UAL COSTS

100 days' operating costs 36o,ooo
'Annual maintenance at $50,000
per ship 300.1000

TWENTIETH YEAR COSTS

Six ferries $2,750,000

Discounting at five percent over 40 years, this cost.stream has a
present value of 16.5 million dollars. If we assumed the facility

@_74-

is used at capacity 25 days per year and at 50% capacity for
75 days, these costs could be recovered by a user charge
of $1.00 for the round trip.*

THE COST OF TRANSPORTATION FROM HOME TO ROWES WHARF

The marginal costs of the home-to-Rowes-Wharf,trip and
return are also part of the cost associated with using this
facility. We will assume that ' since this is a recreational
trip, the consumer values the time in transit neutrally.
That is, on the average he would neither be willing to pay
anything to shorten this time nor would he be willing to
pay anything to obtain any benefits, such as sightseeing,
from t1bis portion of the trip. There is considerable
evidence that on business trips commuters value their
time from anywhere in the neighborhood of $1.55 per hour
to, in some cases, $10.00 per hour (40). Therefore, the
assumption of no net value of travel time is :undoubtedly
biased in favor of the project. However, with this assump-
tion we will be able to concentrate on the money costs of
the trip to the mainland terminus of the island transpor-
tation system. These costs can be grouped into two ca.te-,
gories:

1) The social cost of the transportation resources
Iused in making the trip;

2) If a car is used3 the costs of storing a car down-
town while on the island.

These social costs will vary considerably, depending
upon whether we are talking about a weekend or a middle-
of-the-week day. In order to obtain a first cut at these
costs we will make the following assumptions:

a) As before, the facility is used by 14,000 people
on 25 weekend days and by 7,000 people on 75 middle-
of-the-week days.

b) On the weekdays, three-fourths of the people travel
to Rowes Wharf by the present mass transit system
and one-fourth by car at four people per car. The
average one-way trip length of the former is five
miles and of the latter ten miles.

c) On the weekend days half of the people travel
to Rowes Wharf by car at three people per car.
The average trip length of this trip is.12 miles.
The other half travel ay mass transit at an
average trip length of six miles.
Ir 875,000 users per year. Charges collected at time of use
and discounted accordingly.

-75-

In a real study,,, of course, substudies would be required to
predict trip length and trip modes.

The relevant costs are the marginal costs associated with this
particular trip. On the weekdays, the marginal cost associated with
the off-peak mass transportation users will be quite small, in many
Pases zero, given that the operation of the transit system is not .
a function Of this particular type of trip. On the other hand, those
recreationists who use the system during the rush hour will impose
congestion costs onall,other peak users. As a first approxima-
tion., we have de cided to balance these byassuming that the average,
marginal cost is equal to -the present fare which currently is about
20% less than,,the average cost per user of operating the mass transit
system. With respect to weekday car trippers, we will estimate
their marginal costs at three cents per mile (approximately fuel
and oil. We"are tacitly assuming no-car purchase decision is based
on this potential .trip) and the storage costs at $3.00 per day (the
current market rate of parking downtown), for the parking system
is currently fully utilized during the week and operates in a reason-.
ably competitive market. Thus, the decision of our car user to take
his car implies that.someone else cannot use this space.

On the weekend, the mass transit users will impose no conges-
tion costs on the rest of the community. However, it is quite
likely that some additional service will have to be scheduled to
serve this demand .with resultant differentials in the transit system
labor costs. Therefore, despite the fact that the system as a whole
is underutilized.on the.weekends, the marginal costs are not zero.
Once again, as a first approximation, we will assume them equal to
the fare. This is probably an overestimation. With respect to the
car users, once again we will estimate the marginal cost of the
trip at three cents per mile. However, downtown parking lots are
rather severely underutilized on a summer weekend day. Hence, the
opportunity costs of their use by the island users will be quite
small, probably amounting to no more than the hiring of several
parking lot attendants for weekend duty. As a first approximation,
we will value'this cost at zero.

Thus, the downtown parking case is a classic exaTrple of a
situation where the same use, the storage of a car for a day, can
impose very different demands on the economy, depending on differ-
ences in corrpeting demands. Notethat at present the private market
does not reflect this difference. There is little difference in
weekend and weekday parking rates in downtown Boston, even outside
the central retail district.

Given all-these assumptions, we have the following estimate of
the shoreside costs in constant value dollars:

-76-

is used at capacity 25 days per year an .d at 50% capacity for
75 days, these costs could be recovered by a user charge
of $1.00 for the round trip.*

THE COST OF TRANSPORTATION FROM HOME TO ROWES,WHARF

The marginal costs of the home-to-Rowes-Wharf trip and
return are also part of the cost associated with using this
facility. We will assume that, since this is a recreational
trip, the consumer values the time in transit neutrally.
That is, on the average he would neither be willing to pay
anything to shorten this time nor wou.1d he be willing to.
payanyth-tngto obtain any benefits, such as sightseeing,
from -.his portion of the trip. There is considerable
evidence that on business trips commuters value their
time from anywhere in the neighborhood of $1.55 per hour
to ., in some cases, $10.00 per hour (40). Therefore, the
assumption of no net value of travel time is undoubtedly
biased in favor of the project. However, with this assump-
.tion we will be able to concentrate on the money costs of
the trip to the mainland terminus of the island transpor-
tation system. These costs can be grouped into two cate-
gories:

1) The social cost of the transportation resources
used in making the trip;

2) If a car is used, the costs of storing a car down-
town while on the island.

a) As before, the facility is used by 14,000 people
on 25 weekend days and by 7,000 people on 75 middle-
of-the-week days.

b On the weekdays, three-fourths of the people travel,
to Rowes Wharf by the present mass transit system
and one-fourth by car at four people per car. The
average one-way trip length of the former is five
miles and of the latter ten miles.

C) On the weekend days half of the people travel
to Rowes Wharf by car at three people per car.
The average trip length of this trip is 12 miles.
The other half travel ay mass transit at an
average trip length of six miles.

875,000 users per year. Charges collected at time of use
and discounted accordingly.

-75-

'In a real study, of course, substudies would be required to
predict trip length and trip modes.

The relevant costs are the marginal costs associated with this
particular trip. On the weekdays, the marginal cost associated with
the off-peak mass transportation users will be quite small, in many
cases zero, given that the operation of the transit system is not
a function of this particular type.-of trip. On the other hand, those
recreationists who use the system during the rush hour will impose
congestion costs on ail other peak users. As a first approxima-
tion, we have decided to balance these by assuming that the average
marginal costlis equal to the present fare which currently is about
20% less than.the average cost per user of operating the mass transit
system. With respect to weekday car trippers, we will estimate
their marginal costs at three cents per mile (approximately fuel
and oil. we :are tacitly assuming nocar purcha@se decision is based
on this potential .trip) and the storage costs at $3.00 per day (the
current market rate of parking downtown), for the parking system
is currently fully utilized during the week and,operates in a reason-
ably coppetitive market. Thus, the decision of our car user to take
his car implies that someone else cannot use this space.

On the weekend, the mass transit users will impose no conges-
tion costs on the rest of the cormRinity. However, it is quite nm
likely that some additional service will have to be scheduled to
serve this demand with resultant differentials in the transit system
labor costs. Therefore, despite the fact that the ,@ystem as a whole
is underutilized on the weekends, the marginal costs are not zero.
Once again*-, as'a first approximation, we'will assun-Le them equal to
the fare. This is probably an overestimation. With respect to the
car users, once.again we wiil estimate the marginal cost of the .
trip at'three cents per mile. However, downtown.parking lots are
rather severely underutilized on a surmier weekend day. Hence, the.
opportunity'costs of their use by the island users will be quite
small, probably amounting to no more than the hiring of several
parking.lot attendants for weekend duty. As. a first approximation,
we will value this,cost at zero.

Thus, the downtown parking case is a classic exarrple of a
situation where the same use, the storage of a car for a day, can
inpose very different-demands on the economy , depending on differ-
ences in conpeting demands. Note that at present the private market
does not reflect this,difference. There is little difference in
weekend and weekday parking rates in downtown Boston, even outside
the central retail district.

Given allthese assurrptions, we have the following estimate of
the shoreside costs in constant value dollars:

-76-

Annual number of mass transit users = 33,000
Annual cost of mass transit use @ 50@ round-trip fare $284,ooo
Annual number of weekday care = 33,000
Annual cost of weekday car trips @ 360@, 119,000
Annual number of weekend cars = 58,500
Annual cost of weekend car trips 2 @ 72@ 42,000
Total Annual Cost 445,000

Present value of shoreside transportation
costs.@ 5% for 110 years $7,74o,ooo

SUMMARY OF COSTS

Beach filling and protection $ 3,4oo,ooo
Physical facilities 3,495,000
Island transportation 16,500,000
Shoreside transportation 7,74o,ooo
Total. $313100,000

INTERIM SUMMARY

We have estimated that the present value of the costs of
providing and utilizing the postulated.recreational activity on
Lovell Island for the next 40 years to be $31,100,000 1970 dollars.
If this figure is correct, it implies that, in order for the provision
of this facility to be a more economic use of the island than its
present use, the consumers of this recreation will have to value
the benefits of a day at the island, including the trip, at $1.80
per visit or more. If the average visitor values the trip to this-
island and his stay there at more than $1.80, then the postulated
recreational investment should be built rather than leaving the
island as it is. If the average visitor values the tr--i.p and stay at
less than this value.,. the resources needed to provide this recreation
are more highly valued by society in other uses.

The $1.80 figure assumes the consumer places the same real
(1970 dollars) value on a trip in 1970 as he does on a trip in 2010.
We have suggested earlier that the real amount that the people would
be willing to pay for recreation can be expected to rise proportion-
ally with increases in real income. If this is the case, and using
the income projections on page 70 , then, if people are presently
willing to pay $1.30 for a trip and visit, this value will escalate

-77-

through tim in such a way that the net present value of the project
is zero. That is, we would be indifferent between the postulated
development and leaving the island as it is.

As noted earlier,given the present state of the art, it is
impossible to say how much people value (are willing to pay for)
the recreation that the postulated facility would provide. We saw
earlier that Mack and Myers indicate that it might be in the order
of $2.50 per visit, in which case this project is definitely more
economic than leaving the island as it is, accepting for the moment
all our assumptions about cost and utilization. In any event, in
cases like these where the benefits cannot usefully be estimated,
it is extremely useful for the decision-niaker to have available the
net present value as a function of a number of assumptions about the
magnitude of the benefits to be obtained from a public investment.
In such a situation., which is the typical case, the analyst can no
longer recommend that alternative which is most consistent with the
community's values, but rather is reduced to.pointing out which
alternatives are consistent with what assumptions about these values,
ruling out those alternatives which are dominated-not consistent with
any reasonable set of values. The community or its representatives
will have to explicitly make the value judgments required to determine
the final choice. With this information in hand, the community or
its representatives is generally in a much better position to make
a judgment concerning the remaining alternatives, and much less
likely to choose alternatives that am inconsi '-stent with its own
values, the system analyst's definition of tragedy.

A very simplified example of the display of the type of informa-
tion we are talking about is shown below.
TABLE 111-3
Gross Benefit
per Visit Net Present Value
(no escalation) 40 Years @ 5%
1.00 - 14.3 X 106
1.50 - 5.8x 106
+ 2.6x 106
2.50 + 11.1 x 106
3.00 + 19.5 x 106
3.50 + 26.8 x 106
4.00 + 36.3 x 10
(Escalation with real income according to page 70

1970 2010
1.00 2.90 - 7.0 x 106
1'50 4.35 + 5.2 x 106
6
2.00 5.8o + 17.2 x 106
2.50 7.25 + 29.5 x 106
3.00 8.70 + 42.8 x 10

-78-

INTRODUCTION OF 'UNCERTAINTY INTO THIS PROBLEM

There are a great many areas of uncertainty related to this
prcblem. There are uncertainties with respect to costs. We have
Just.indicated the uncertainty with respect to demand. However,
many of the forT)er set ofuncertainties can be dispelled by more
careful cost analysis; therefore, we have not chosen to apply
probabilistic methods in this area. We could have attempted to
extract the corffmmity's subjective distribution on the present and
future values of the amount people are willing to pay for the
recreation and then shown whether the development was consistent
with this distribution. However, given the problem associated
with communal probability distributions, this is not usually a
useful exercise and we have chosen to present the decision-n-oker
with the results of assuming different demand values for a number
of these values. Rather, we have chosen for our present expository
purposes to apply uncertainty to an entirely different area that
of water quality at the facility.

The value or benefits associated with a recreational beach in
the mouth of Boston Harbor during the next 40 years will be critically
dependent on the quality of water at this beach through this time
period. At present, the water quality in Boston Harbor ranges from
anerobic cesspool to marginally suitable for bathing. Figure 3. 4
indicates the present federal classification of the harbor. These
ratings are probably generous. The beaches in Winthrop have been
closed to bathing for some years and the South Boston beaches are
closed periodically. As well be seen, the SB line (water @uitable
for bathing but restricted to shellfishing) extends along the inshore
coast-of Lovell Island. However, much of the waters rated SB on
.,this chart is shunned by swimmers and periodically very high coliform
counts in these areas bear out their judgment.' In short, at present
the waters in the proposed,beach area are suitable for swimming
almost all the time. However, they cannot be called clean and
further deterioration would materially affect the quality of the
swimming. Thus, in investing in a 40-year or greater lifetime sys-
tem., the community mist carefully consider what the water in the
areas will be like during this period.

Of course, the water quality in the harbor is a variable which
is under the cormRzdty's control. Let us postulate three alternative
developments:

a) 'Ihe region decides to make a concerted effort to improve
the water quality in the harbor through such means as construction
of a deep rock tunnel carrying all combined sewer effluent to deep
water, as suggested by Camp, Dresser and McKee, at a $2,000,000,000
initial cost (41 ). As a result, the water quality in the vicinity
of Lovell is such that it in no way limits the use of the area as a
beach.

-79-

%V.

Winthrop

L
r o t Atlantic Ocean
SC
@SA
rim

L
ell
ov

Island
B8 @bN,@

N
SB ."Z Hull

-Icy,-,
SA

A
ra

Ingiam

BOSTON HARBOR
Water Quality Classification

FIGURE 3.4

Commonwealth of Massachusetts
Water Resources Commission

.-8o-

b) The region decides not to decrease the water quality in
the harbor further. Collectors for part of the combined sewer
outfalls are constructed and portions of this effluent given
primary treatment. Increased demand from population growth is
handled through outlets other than the harbor. As, a result, the
water quality at Lovell stays where it is--usable for bathing but
intermittently embarrassihg and not comparable to the Cape or the
beaches well outside the harbor.

c) The region opts to use the harbor more intensively for
sewage disposal. All the growth in demand in the metropolitan
district is handled through the harbor. Ther@e_ is no upgrading
of the combined sewer system which periodically discharges large
quantities of raw waste into the harbor. As a result, in ten*years'
time , the beach at Lovell@is closed to bathing.

Given these three hypothetical possibilities, how do we
includethem in our analysis?

Even though the future water quality in the harbor is under
the re *on's control, from the point of view of making the decision
91
as to the investment at Lovell today the future water quality can-
not be predicted with certainty. It is a random variable or,.more
properly, a random process, since we are dealing with a random
variable through time.* The problem then is to estimate the probabi-
lity,that at any time in the next 40 years the value of the water,
quality,at Lovell will be such and such. With such probabilities
and knowledge of the change in benefit values:with water @uality, we
can straightforwardly, if tediously, apply the expected value
analysis outlined in Chapter 2. For our purposes here, we will
arbitrarily siaplify the situation in order to point out how this
might be done.
We will assunie that !:only three of the nWriad possible time
histories of water quality through the next 40 years at Lovell have
probabilities high enough to deserve analysis. These three trajec-
tories are shown in Figure 3.5 . Further, we will assume that, if
the water quality at Lovell is SA., then a visit to the island is
worth 25% more to the bather than if it is SB. If the water' quality
is SB, then the values predicated inthe earlier analysis under
certainty hold. If the water quality 1s.SC, then the beach is closed

*Thislexauple points out an important difference between our use of
the term 11random variable" and the classical statistician's. The
future water quality in the harbor is not random variable to the
statistician, since he cannot hypothesize a series of experiments
whose statistics would reveal the value of this variable. For us,
anything1whose value we do not know with certainty is a random
variable.

-81-

\,D
co
0

(D
ct

C@ (D (D (D
(D 0 Q 0
ct ct (:t
0 0 0
FS I-S I-S

ct
0

0 N)
C)
C)
C)
P-)
C-t
(D
I-S

N.)
C)
ct 1-i
C)

and the investme nt in the island is scrapped, at negligible
scrap value. Table 111.4 is'an expansion of Table 111-3 and'
indicates the net present value for each of these eventualities
under a range of assumptions.about the originalvalue of the
recreational activity.to the swimmer.*

TableIII.4 hegins to:illus,trate the basic problem involved
in leaving valuations up to the decision-maker(s). It doesn't
take very many such valuations before, in combination, they
lead to a very large number of alternatives and the analyst's
report becomes no more than a confusing welter of figures.
The analyst must, therefore., impute valuations wherever
he can reasonably do so, making clear to the the decision-
maker(s) under what assumptions such valuations have been
made, leaving the decision-maker(s) the responsibility of
making only one or two of the most intractable and critical
judgments._
In the case at hand, if the society is an expected value
decision-maker and is willing to assign subjective probabilities
to each.of the three postulated time histories of water quality
we can once again collapse Table'TII.4. This author, by asking
himself questions of the sort: At what probability, x,would
be indifferdnt between a lottery ticket yielding him $100 '0
with probability x and a lottery ticket vielding him $1000
if time history A occurs and repeating t@e process for time
histories B and C determined that his probability distribu-
tion of the three alternatives is:
Pr(A)=.05
Pr(B)+.50
Pr(C )=.45

One of the objections that one sometimes hears to the
above type of analysis is that generating such figures
is useless since the,fi-gures depend on assumptions; change
the assumptions and you change the figures. But the very
point that we are trying to make is that the figures make
clear which alternatives are consistent with which assump-
tions. They had-better change with change in assumptions. Of
course, sometimes people object to being faced with the con-
sequences of their assumptions. Alexander calls this a
"loss of innocence":
The use of logi,cal structures to represent design
problems has an important consequence. It brings
with it the loss of innocence.. A logical picture
is easier to criticize than a vague one since
the assumptions it is based on are brought out in
the ol2en. (emphasis ours) ... I wish to state my
belief in this loss of innocence very clearly
because there arelmany designers who are apparently
not willing to accept the loss. They insist that
design must be a purely intuitive process; that
it is hopeless to try and understand it sensibly
because its problems are too-,deep.." (42.)
Alexander is talking about architects'and urban de@signers.
But the same point applys to humans in general and polititians
in particular.
-83-

TABLE i i 1. 4 NET PRESENT VALUE OF LOVELL BEACH FACILITY UNDER
THREE DIFFERENT WATER QUALITY TRAJECTORIES

NET PRESENT VALUE GIVEN TRAJECTORY A

INITIAL GROSS BENEFIT NET PRESENT VALUE
PER INDIVIDUAL TRIP 40 YEARS @ 5%
(no escalation with income) (Millions of 1970 dollars)
$1.00 -12.3
1.50 - 2.3
2.00 +-7.2
2.50 +16.9
3.00 +26.4
(escalation with real income
per page 69)
$1.00 + 1.5
1.50 +17.7 rim
2.00 +33.9
2.50 +50.3
3.00 +66.4

NET PRESENT VALUE UNDER TRAJECTORY B
(same as Table
(no escalation with income)
$1.00 -14.3
1.50 - 5.8
2.00 + 2.6
2.50 +11.1
3.00 +19.5
(escalation with real income)
$1.00 - 7.0
1.50 + 5.2
2.00 +17.2
2.50 +29.5
3.00 +42.8

NET PRESENT VALLE UNDER TRAJECTORY C
In this case, no costs are incurred after the tenth year. The present
value of the truncated cost stream is $16.2 million dollars)
(no escalation with income)
$1.00 -9.3
1.50 -5.8
2.00 -2.4
2.50 +1.1
3.00 +4.2
(escalation with income)
$1.00 -8.5
1.50 -4.7
2.00 -5.8
2.50 +3.0
3.00 +7.8

-84-

Let us for the moment assume that the author is an
expert in the water quality of.Boston Harbor, which he
isn't, and that the analyst is willing to accept this..
distribution as'descriptive of the community's distri-
bution on this random variable or, better yet, the
relevant decision-maker(s) are willing to accept this
distribution as descriptive.of th,e-community's.distri-
bution, then, as outlined in Chapter II,Table 111.4,
collapses to:*

TABLE 111-5 EXPECTED NET PRESENT VALUE OF LOVELL BEACH
FACILITY ASSUMING PROBABILITIES OF WATER
QUALITY TRAJECTORIES A,B, AND C ARE .05,
.50, and .45, RESPECTIVELY
INITIAL GROSS BENEFIT EXPECTED NET PRESENT VALUE
PER VISIT 40 YEARS @ 5%
(millions of 1970 dollars)
(no escalation)

$1.00 -12.5,
1-50 5.6
2.00 + 2.7
2.50 + 6.9
3.00 +15.2
(escalation with real income)

$1.00 7.3
1-50 + .6
2.00 + 9.9
2.50 +18.0
3.00 +27.2
Thus, accepting our costs and other assumptions, if the
community has these probabilities on water quality, the
facility should be built rather than leave the island
as it is, if the pre Isent average gross benefit (the
mayi.mum amount the average user is willing to pay for
a visit) is greater than about $2.0.0 assuming no escalation@
or greater than about $1.50, given escalation in proportion
to nrojected increase in real income. Notice that
sin(,r, we have not evaluated any alternatives

'i-_Tn_a._n actual study, this distribution. might.be determined by
assembling a group of authorities on the subject, extracting the
distribution of each, and letting them argue out differences in
the distributions. From this point of view, subjective pro-
bill.tIT becomes a means of incorporating and weighing expert
op-inion in the cost-benefit analysis.
R .
..."Tt fis important- to recognize that we are not guaranteed -
the values shown in Table 111-5. Let.us assume that the
community-'s present gross benefit is $2.00 and no escalation
is assumed. Then the community sho.uld,build the facility rather
than leave the island as it is. This is the right'decision;
that is Uhe decision that is consistent with itt apsumed values

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nm
a -)

other than the postulated beach fac ility and implicitly
leaving the island as it is at zero net benefit, we cannot
make any judgments about whether or not the beach facility
is the best use of this island, only that in these cases it
is better than leaving the island alone. A full-scale
analysis of the island would include a representative
spectrum of different alternative employments and mixes
of these employments. For example, by postulating a
high-rise residential development as well as a beach,
we may be able to take advantage of substantial economies
of scale with respect to the island-mainland transportation
system, especially since the residential travel will generally
flow in the opposite direction to the recreational flow.

In making comparisons of the present alternative with
other possible developments, displays such as Table 111.4
will be useful in comparing the beach facility with
other developments which will be less sensitive to water
quality, such as a pure high-rise residence or almost
completely insensitive to water quality, such as an
oil terminal.

FINANCING THE PROJECT

Let us assume for the moment that tJ-e community's
decisionmaker(s) decide that the present gross benefit
per visit is $2.00 and some escalation': of this value
is in order and that providing the beach and leaving
the island as it is are the only two feasible alterna-
tives, in which case our analysis indicates that, if the
community is going to operatein a manner consistent ra
with its values, the beach should be built. The question-
that immediately arises is who is going to pay for it
and how? From whom are we going to transfer the resources
required to implement this project? This question is
explicitly distributional in nature afid hence our complete
concentration,on economic efficiency in this report becomes
more than a little bit uncomfortable at this point. -However,
if we are prepared to be indifferent to the haphazard
and rather small scale transfers of income which can be

(continued) and the knowled Ige it has at the time of
the decision. Given that it does so, it is quite possible
that trajectory C will obtain in which case the project
loses money. This does not imply that the wrong decision
was made. One of the most basic differences between decision-
making under certainty and decision-making-under uncertainty
is that in the latter case one cannot judge the correctness
of the decision by the outcome.

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effected at the project level, efficiency has a number
of important things to say about how the project should
be financed.*

In fact.,, it is not'possibleto be consistent with
our basic principles unless the user is.charged at
least the marginal soqial cost of his trip to Lovell.
In this sense the provision of public projects and
their financing cannot be separated. (43) Failure to
charge the u ser the marginal cost of his trip will
lead to Pareto-inefficient congestion, and public
pressure for expanded-facilities which would not be
demanded at marginal costs--inefficient use of a
project who'se'justification was economic efficiency.

Now a floor on the marginal social cost of an
individual trip is the value of the added resources
required by the marginal user which, as in the case
above., can be quite small. If the beach is'there
and the ferries running and if there is room for an
additional passenger and an additional beach blanket,
the additio 'n of one more beach user implies that the
rest of society foregoes almost nothing. Therefore-,
it appears we are back in the now-familiar- decreasing
costs bind--efficiency requires price equal to mar-
ginal cost and the revenues thus generated will not
cover the total costs of the project. Fi.nancing
remains a problem.'

This is true. However, there are several ameliora-
ting circumstances which point to user charges above :.
the.cost of the extra resources implied by the marginal
trip.

1) In situations where alternate goods (say, an
inland swimming pool), are charging above marginal costs,
then on'e can argue for a charge above marginal cost to
prevent over-utilization of the subject project at the
expense of underutilization of the c-ompetitive project.(44)

To the extent. that the nation opts to perform any desired
income redistribution through taxation at the national level,
the easier it will@be to be indifferent to income transfers
at the project level--an important by-product of income
redistribution at the'national level.

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The marginal costs the user should be charged
should include not only the market costs implied by his
use but any extra non-market costs such as pollution
which result. This consideration is unlikely to be
important in the cas.e*at.hand but might be critical
in the case of say, industrial use.of a publicly Fin
provided navigation facility. J
3) The fact that the differenc:e between the.total
of the.user.'charges and the total of the costs of the
project will have to be made up by taxation which itself
implies.a distortion of the economy argues that user
charges should be set somewhat Above marginal costs.,
See reference

4) Most importantly, in cases.where the project
is being used at or near capacity, the costs of the
extra resources required by a marginal user are no
measure of the social cost of the use for one person's
use of the facility will be preventing or decreasing
the value (through congestion) of someone elses use.
The amount the other users actual and potential including
the potential -user shut out would be willing to pay
to not have him use the facility is the social cost
oP this trip.* In short, the basic purpose of pricing,
is to ration out the existing facilities to those @users
who value it most highly (given the present income dis-
tribution). Efficiency requires that prices should
be raised to the point where this rationing is effective.
This can imply users charges which are much larger than
even the average cost of the use.

in accordance with our basic definition of social cost)
this is an either-or situation. If the actual users-
are willing to pay more for one less person on the
beach then potential users are willing to pay
to take the place of the marginal,user, then the
actual users determine the social cost of the marginal
users. Otherwise, the potential User's bid is the social
cost. A case of the former possibility is evident
at those ski resorts which Charge a premium for limiting
daily sales of lift tickets.

_88-

Shutting-low in come groups off@from public projects
just when the demand for these projects is at a peak
may seem to be an awfully high price to pay for resource
efficiency. However, as.we shall see, application
of these principles c an be a two-edged sword working
for as well as against, low income groups. Consider
the case of public project, like our proposed beach,,
which is subject to time-varying demands. The demand
for the project on a weekend will in general be much..
higher than the demand-on a weekday. Consequently,
user charges should be higher.-quite possibly much
higher on weekends than on weekdays. One may find
that on a weekend one has to charge $4.00 per person
per day to prevent congestion while on a weekday one
is forced to reduce the charge to [email protected] head to
fill the beach. Under the assumptions, made earlier,
this combination of charges would make the project
self-supporting. Furthermore, the consequences with
respect to income distribution are obvious. The week-
end user would-be the middle income citizen whose
job both forces him and allows him to pay the premium
for weekend use. The week day userwould be middle
and lower income children who have the freedom to take
advantage of the beach while their more fortunate
brethren are working. In,short "there are many
situations in which efficient pricing of public goods
will coincide with the most egalitarian tastes a6out
income distribution.*,

All the above notwithstanding, in many cases,
efficiency will call for the provision of public
projects for which the efficient user charges will not
cover the' total costs of the-project. Cost-benefit
analysis is Almost completely silent on how the differen-.
tial should be collected. All we really know after this
analysis is that, given the postulated values (average
benefit of $2.00 or more per trip) there exists a scheme.
(a set of payments'and,compensations) for paying for
this facility such that, after such payments and.

This idea works better when the groups involved are low
income and middle income than when they are'middle income
and high income. Commuter train charges should peak
at rushhour. High.income people may find it easier.
to avoid the peak charges than middle income,

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compensations are made,, everybody will feel- at least
as well off and some people will feel better off with
the.beach rather than leaving the island as it is.
Cost-benefit analysis is of little or no help in
finding such a scheme and, more to the point, of
finding a financing-program which is institutionally
and politically feasible. If no feasible financing
strategy can be found, then the project may have to
be abandoned whatever its present value. However,
the larger the net present value, in general, the
easier it will be to find an acceptable financing
scheme and the harder one should look for such a
scheme. Thus, from the point of view of financing,
cost-benefit analysis is a screening method. Those
projects which have positive net present values are
candidates for which one should attempt to find a
feasible financing method; those which have a negative
net present value or are dominated by a feasible
mutually exclusive alternative with a greater present
value can be dismissed at once.

Even if no politically feasible scheme which
compensates-all those negatively affected by the invest-
mend can be found, it may be good social policy to
undertake a project with positive net present value
e',!*c-n though some people are put in worse positions
than before, provided that the benefits to others are
sufficiently great and widespread. In so arguing, one
j-- taking tacit advantage of the fact that if there
are many such projects,,one 1@,y be able to state that
with high probability the iaw of large numbers will
eventually equalize the benefits.

Finally, given political realities., it may be
self-defeating to push efficiency in project pricing
too hard. Often, if a project is really worthwhile,
the- inefficiency implied by non-marginal cost financing
will be small compared to the overall benefits of the
project and, 'in searching for a financing scheme one.
should concentrate on political feasibility rather
than at attempting to milk the project1for the last
io-,a of net present valued benefits. In so doing
one-should remember that this is not always the case.
The net present valued benefit of a project is not
independent of the pricing scheme and in some cases
this dependence can be crucial. Attempts at average
cost pricing of urban mass transit may be a prime
reason for its,failure.

-go-

SUMMARY OF CHAPTER I I I

This completes our exemplary analysis. We have already
commented on its lack of detail and comprehensiveness and will
not repeat these caveats here, for they can be overcome by straight-
forward application of effort. For Lovell Island an actual-cost-
benefit study might include the preliminary costing of eight or
ten postulated combinations-of recreational facilities, residential
development, and industrial uses and an estimation of their benefits.
This process would be iterative in the 'sense that, in the analysis
of these alternatives, it will.become clear which modifications of
these alternatives should also be studied. We believe it should be
clear from our cursory analysis of a single alternative how these
investigations should be carried out, the kinds of assumptions that
will be required, and the type of judgment which will be required
in deciding whether to impute a value or a probability distribution
to a hard-to-estimate variable or to present the decision-makers
with the results as a function of this variable and let them-make
a judgment on it either explicitly or implicitly. Thus, if Lovell
Island were or could be considered to be an isolated entity, the
application of cost-benefit analysis to this resource would present
no great conceptual difficulties.

The problem is that Lovell is not a completely isolated econo-
mic entity and considering it to be so may result in inefficient
suboptimization and it is in this respect that the preceding analysis
may be misleading. For example, consider the island transportation
system. If Lovell is considered in isolation, it has to bear the
full costs of this system. However, if the other islands surrounding
Lovell were developed at the same time, all of which were served by
the same transportation system, then the development on-Lovell would
have to bear only the marginal costs of serving Lovell. Since public
transportation systems are typically characterized by marginal costs
a good deal less than average costs, this would make this transporta-
tion appear considerably cheaper from the point of view of Lovell
and may change the ranking of the alternative developments on Lovell.
Or consider the problem of spillovers. An isolated study of
Lovell might conclude that the net present value of the island is
maximized by utilizing the island as an oil terminal, which use might
seriously decrease the benefit which could be obtained from the
neighboring islands due to air, water or visual pollution. Unless
this decrease is included in the analysis of Lovell, serious misallo-
cations my occur.

Therefore, as always, the analyst is faced with defining
the boundaries of the problem and accounting for the irrPortant
effects that cross those boundaries. The more conprehensive the
boundaries', the less likely one is to leave out iEportant benefits
or disbenefits and, at the same time, the more staggering the
analysis problem becomes. For exarrple, considering Lovell alone,
eight,or ten well-chosen alternative developments may cover the
range of possibilities quite well. However, in order to consider
the harbor islands as a whole, one may have to analyze hundreds of
conplex alternative developments to be able to say with any degree
of confidence that one has locPted a development which comes
close to maximizing the net present value obtainable from the
islands. The problem of corrprehensiveness versus analytical
feasibility is considered in more detail in Ohapter IV.

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CHAPTER IV

REGIONWIDE DEVELOPMENT STRATEGIES

Introduction

The purpose of this chapter is to lift our@view
from the analysis of individual projects to the con-
sideration of the efficient allocation of a regional
coastal zone taken as a whole. We begin by considering
some basic theoretical and practical limitations of
project by project analysis which emphasize the impossi-
bility of governmental analysis of all possible alloca-
tions of the coastal zone ' even if this were a politi-
cally feasible or desirable undertaking. Thus, the
great bulk of coastal zone decisions must and certainly
will remain the province of a complex constellation of
decentralized decisionmakers at the individual, local,
state and federal levels. The discussion then focuses
on what we can say about organizing this structure in
such a manner that it will tend to operate toward an
efficient allocation of the coastal zone. Finally,
we return to a discussion of our basic assumption that,
society's goal is Pareto-efficiency relative to the
present income distribution and reexamine our conclu-
sions in the light of this provisional assumption.

Limitations of Project by Project Analysis

The allocation of coastal areas is just a special
problem within the general problem of locational economics.
All the problems of zoning, taxation, and striking the,
right balance between and among public and.private uses
are present. Since there is basically a fixed supply
of land or space, the fixed supply of coastal areas
does not make coastal allocation problems unique. The
problem may be more acute ' however, if there is more
demand for the fixed supply of coastal areas. Being
more valuable pieces of property, the allocation decisions
are correspondingly more important.

The allocation problem should.not be thought of as
fitting square pegs into square holes and round pegs into
round holes. There are a few activities that must.be
located in particular' spots (the extraction industries
are the best example), but most activities can be located
in a variety of locations on the shore and back from the
shore. Different locations may have different associated
net present values, but there is not typically only one
location with@a positive net present value for each project.
Thus, the social problem is how to maximize the net present
value of all the projects which might be located in an area
and not simply to maximize the net present value of.each
individual project.

The basic problem is that all locational decisions are
by nature interdependent through the fact that one
project's use of a particular portion of the coastal
zone excludes another project from using this particular
area. Viewed in this regard individual projects
are interdependent and in a sense mutually exclusive.

In a properly functioning market'this interdependency rim
would be taken care of by the price of land. Consider
the following simple example. Suppose we have only
two locations: location 1 is on the shore, location 2
inland, and only two possible uses of these locations.
Use A is an industrial plant which after all spill-
overs are properly accounted for has a net present
value (exclusive of the cost of,land) @of 10 in location
1 and 9 in location 2. Use B is a recreation facility
which has a net present value of 4 in location 1 and
1 in location 2 also exclusive of the cost of the land.
Thus, we have the following table.
LOCATIONS
U 1 2
S A 10 9
E
SB 4 1

The first thing to notice is that even if the above
figures correctly represent the net social benefits of
the respective projects we should not allocate the plant
to I and the recreation facility to 2, for this would
giv.,-, a total net social benefit of 10 + 1 = 11 while
the opposite allocation would yield a total of 13. It
costs the plant less to move to its second best location
than it does the recreation facility.

Given a properly functioning market for land the
desired allocation woij1d be achieved for the recreation
facility could afford to bid up to 3 units for locat-ion
A while it sould pay the plant to bid no more than 1
unit. The market value of location A would be something.
in excess of one unit more than the market value of location
B and the recreation facility would obtain the property.*

Note, however, that even if we deducted the market
value of the land in our cost benefit analysis, the
results narrowly interpreted would be misleading. Say
the land cost is 1.5 units and we examine location A in
isolation. The net present value including land costs
of the plant would be 8.5 versus 2.5 for t'he recreation
facility and we would locate the plant at A. Apparently,
cost benefit analysis points to a demonstrably inferior
allocation.
This result presumes that the organization representing
recreation interests is financed in a manner consistent
with society's desires. More on'this later.

The key to this problem is that the alternatives
are not:
1 put plant at A
2 put recreation facility at A
3 do nothing with A

and nothing el..;e. If this were the complete s-et of
alternatives., we should allocate A to the-pla.nt as indi-
cated. However., the actual set of alternatives are:

1 allocate plant to A, recreation facility to B
2 allocate recreation facility to A,plant to B
3 allocate plant to A,do nothing with B
4 allocate recreation facility to A.,do nothing
with B
5 allocateplant to B.,do nothing with A
6 allocate recreation facility to Bdo nothing
with A
7 do nothing with either location

In summary, cost benefit analysis will not lead one
wrong if one evaluates the total net present value of
the full range of alternatives.* However, the number
of alternatives increase combinatorially with the
number of possible locations. This then is the basic
conceptual limitation on cost-benefit analysis: if
one doesn't evaluate the full range of alternatives,
then one can be led astray,but the evaluation of
the full range of alternativesis generally completely
infeasible. This limitation is in a real sense more
confining then the more-often-mentioned difficulties
in measuring non-market benefl.ts.,for as indicated
in Chapter 3 this latter prob-Lem can be ameliorated by
performing the analyses over a range of values for
the non-market benefits.

This is not to imply that we believe project analysis
to be useless. Far from it, there are dozens of projects
suggested for the Northern New England Coastal Zone deserving
of searching cost-be,iefit analysis-projects for which
one can usefully hold the rest of the coastal zone fixed
while performing t@,e evaluations, projects for which although

A fam-ous varlent on this kind of error is to trim the
set of alternatives down to acceptance or rejection of a
'Master Plan.' in which the accounts of a.vast number of
projects are pooled and if the net present value of
the pooled project is positive all the component projects,
some of which may be-grossly inefficient, are accepted.
The Missouri River and Upper Colorado irrigation plans
may be cases in point.(15)

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one obviously cannot analyze all possible combinations
of locationslone can postulate a representative and
workable spectrum of alternatives. A prime example
is the proposed Maine.refinery. See Appendix C.
This limitation does imply, however, that whenever
we undertake cost benefit analysis of locational
decisions we are engaging in a form of suboptimization
with all the dangers attendent there to. And it does
imply that only a very few of the multitudinous coastal
zone allocations decisions can usefully and feasibly
be treated by the type of analysis outlined in ChapterIII.
It does mean that the great bulk of coastal zone allo-
cation decisions (including those based on these project
analyses) will have to be made by a complex decentralized
political structure.* The question then is: given what we have
seen so far, what can we say about how this political
structure should be organizpd if society's goal is the
Pareto-efficient allocation of the coastal zone with
respect to the present income distribution@ *We shall
discuss in turn the following mechanisms through which rM
society can directly control the allocation of the
coastal zone:

1) Zoning
2) Property Taxes
3) User Charges
4) Effluent Charges

Zoning

At present, the single most important means of
interfering with the private market allocation of the
coastal zone is through zoning. Zoning at least in the
northern New England Coastal Zone is presently in the
almost exclusive control of the local community. Presumably,
local zoning was orginally evolved as a means of controlling

Conceptual problern.: aside, good cost-benefit analysis
requires considerable time and effort (considerable
resources). Only for a few of the most substartial public
investments will it be efficient to devote this time
and effort for the resulting increase in information.
And as our simple little example hints a decentralized
structure oriented around the private market may be
capable of making these decisions in an efficient
manner.

_96-

negative spillovers and facilitating certain contracts.
It was observed that, for example, an industrial use of
a site adversely affects the property values of neighboring
residential sites. And it was further observed that if
all industrial uses were grouped together, the sum total
of these spillover ePfects was less than if they were
spread throughout the town. This grouping might not
have occured in an unregulated market due to contracting
costs. Thus, zoning to effect the desired reallocation
was almost universally irstituted.

However, at the same time, the towns universally
opted for the property tax as a means of generating
public revenues for the provision of such public
goods as sewerage, access*, police protection, and
generally education. It became quickly apparent that
given p@-)perty taxes, zoning and the public revenues
and costs were coupled. With suitable zoning, a
town could control the distribution of income within
the community, the age and size of families, and a
variety of other factors which have little to do with
spillovers or contractinr (7osts. (See Appendix A for
a description of one coastal town's view of zoning.)
At this point, any proposed zoning change i6 evaluated
primarily on its marginal effect on public revenues
and c-sts. The question becomes: will the change
increase the town's revenues more than it will increase
the cost of the services it provides? At this point,
zoning becomes heavily biased toward small, high income
families, industrial and commercial uses (the very uses
it originally w,-,-:; designed to control), and most impor-
tantly in the coastal zone, in favor of high income
summer residences (which generate revenue while placing
almost no burden on the town's costs) and away from
public recreational facilities (which decrease town
revenues while placing a very high burden on costs).
Thus, we see that local zoning when coupled with the
property tax and local provision of a variety of ser-
vices can have an entirely different result than that
presumably intended originally. Zoning decisions be-
come focused on the parochial benefits and disbenefits
of any proposed changes rather than on spillovers.

Still in all, zoning has many real and potential
virtues. It is a uniquely effective, and very low
administrative cost means of both controlling certain
types of spillovers and affecting an efficient geographical
specialization of land use.* We shall argue that many of
the 'present misallocations laid to zoning are really a

The degree to which this specialization can occur is
presently limited by the size of the zoning units

-97-

fault of its tie-in with the property tax and an
historical overreliance on local coastal zone communities
for regionwide public goods. If the changes which we
recommend in these areas could be effected, much of the
criticism of problems associated with local zoning
would be greatly amelio*rated..

Be that as it may, some problems would remain and
it is not at all L;lear that the changes which we will
recommend with respect to the property tax are politically
feasible at least in the short run. Given this, what FO
can we do to improve our zoning procedure?

We have seen that the basic probl,em is parochial
benefits. In so far as parochial benefits are a wash
within the purview of the zoning body, that body is
likely to concentrate on spillovers as locally per-
ceived and can be expected to improve on the private
market allocation. Given that we have a variety of
governmental levels at which we could effect zoning,
a possible approach is to give control of a particular
type of decision to the lowest level at which the
parochial benefits resulting from the decision will
be a wash. This leads to a hierarchical structure in
which progressively more general levels of government
have control of progressively more general decisions.
Consider the case of a New England refinery. Frofn the
point of view of the Federal government, parochial
differentials involved lue to changes in the state in
which the refinery is 1,.,cated will be a wash. Thus,
the Federal government could be given control over
whether or not a refinery should be built in a parti-
cular state. Now from the point of view of the state
chosen for the refinery, differentials in parochial
benefits due to differences in the township in which
the refinery is located are a wash and the state could
be given control over picking a township. From the
point of view of the township chosen, parochial benefits
due to changes in the refinery site within the town are
a wash and the town could be given control over the
actual site.

It might be both more efficient and more politically
palatable if in the actual selection process the system
could work backwards with each potential town picking
a site which it suggests to the state level, which in
turn picks a town, forwarding its result to the federal
government level which picks a state or nixes the whole

_98-

idea. The economies@associated,with this division
of analytical effort are obvious. (Something vaguely
resembling this happens now with respect to choice
of sites for major expositions or particularly attrac-
-tiVe government installations. ..However., the.process
might well stand some formaliz,ation.)

Unfortunately, as outlined, it would work only
for those projects for which the net of the parochial
benefits and spillovers within the community were
positive. At present large scale non-commercial
recreational developments and conservationists uses
of the land often represent parochial losses to the
community involved.

Thus., if we are going to accept voluntary hierarchical
zoning we require a system such that any project which
is efficient with respect to society as a whole
will appear to be a net benefit to.the locality. Given
,the parochial benefits associated with industrial and
recreational projects and the positive-local spillovers,
associated with low intensity recreation and conservation
setting up such a system may not be impossible. However,
as we shall argue in the next section, in order to arrive
at such a situation considerable structural changes in
the means by which the towns generate their revenues
will be required.

Property Taxes

Property taxation as presently applied in the coastal
zone has some serious difficulties. Ad valorem property
taxes have macroeconomic problems. They are unresponsive
to economic cycles. They become increasingly regressive
as the society becomes increasingly wealthy. However.,
we shall not be concerned with these issues, but rather
with their effect on the efficiency of coastal zone
allocation. Property taxation as presently applied is
intimately tied to private market values (often with a
rather considerable lag.) In so far as the market overvalues
private uses and undervalues publi,c, a town development
policy will react accordingly. This situation is aggravated
by the fact that public uses of the land are generally
exempted from property taxes altogether. In the absence
of a local political body with effective development control,
such a property taxation scheme would be biased in favor
of public uses of the land and result in underdevelopment
by Paretian standards. However, if a town is deriving
its revenues from property taxation, it cannot afford to
dedicate land to public use and, in fact, strives to

-99-

dedicate land t,o uses which have a l.ar.ge.differential
between.resulting private market'evaluation of the
property and cost of services required'. We feel
confident that the netleffect of property taxation
based on market value is.a bias toward high income
residences and industrlal.and commercial Uses of the
coastal zone. It is certainly biased against most
non-taxable uses of the land,- public recreation and
conservation.

It is our apinion that a better alternative would
be:

a) The institution of user charges to raise munici-
pal revenues--a fee for sewage, a feefor police
protection, etc., all base,d on the costs of pro-
viding that service to each person,orlstructure.*

b) Dependence on broader politic al units then the
municipality for public goods serving more than
the municipality such as large recreation faci-
lities and education.

..A fee based taxation scheme would still be income
regressive. However, we feel that the local municipality
is a bad level at which to attempt to effect society' s.
desired redistribution of income. User charges hAve
the advantage that local development decisions would not
be biased by income or age or toward industrial or
commercial uses. In so far as the public goods which
the town provides are subject to decreasing costs and
the town charged average costs, this taxation scheme
would still bias the local zoning boards decisions to-
ward. overdevelopment in general. However, we do not
feel that the services being offered are subject to
large economies of scale and that thes,e economies of
scale will be at least partially balanced by increasing,
costs due to interference, congestion, and the require-
ment to use increasingly-unfavorable land for even a
moderately well developed community. The one possible
exception, sewage treatment, also happens to be the
since we are going to recommend chargi nig these spillover
municipal service with the greatest spillover cost and

User charges are required by efficiency considerati -ons
anyway as outlined in ChapterI-TI. Here we are concentra-
ting on their interaction with political considerations.

_100-

costs, there will be a tendency here for the economies
of scale to be balanced by increasing-effluent charges.

In short,,we feel the development bias-introduced
by user charges will be considerably less than that
which presently occurs under ad valorem property
taxation. If a new development, whether it be a resi-
dence, a factory, or a regional beach, just pays its
way as far as the town coffers are concerned, the local
zoning board will not be influenced by effects on tax
base, etc., and will concentrate on income transfers
into the locality associated with the development (bad)
and the spillovers (good).

The institution of user charges has one basic
conflict with the American tradition (of the last
ninety years) and that is the provision of public
education without reference to income. At the ele-
mentary and high school level this has been handled
by the local communities. Obviously, a user charge
(an education fee to each family based on number of
children being schooled) which would be required if
the town's decisions are to be not biased against
low income families would defeat the income redis-
tribution aspects of 'this policy. Therefore, the insti-
tution of such a charge would have to be coupled with
educational support from*a broader governmental level
if this principle is to be preserved * This support
could take the place of a payment to the town for each@'.
child educated or a payment to the parent positively
earmarked in some way for education 'in which case
the private market could be used to provide education.
-@rably
Both these alternativeswould provide a conside
more even quality of education then the present system
which is clearly biased against the child in low income
areas and large cities. A principle seems to be
emerging; effect desired income transfers at.levels
higher than the municipality.

Similarly, user. charges will have to be levied.
on those public developments such as large scale beaches which
serve an area larger than the local community. If the
town provides sewerage, police or fire prote-ction.-to.
this development then it will have to be compensated for
this service if its development decisions are to'be not,
biased against such developments. This implies that
the public facility will have to be owned by-a broader
based governmental body representing all the-potentialusers
of the development, who will then pay the town for the
services provided.

_101-

The common practicelalong the coastal zone of asking:-.
the local community to provide region serving beaches--
presumably on the-basis of.parochial benefits3 which
parochial benefits are most readily capitalized on@
by the abject commercialization of the beach area--
should be ended.. If the region wants abeach,.it should
pay for [email protected].

Effluent Charges

Up.to this point the discussion has focused on
means of decoupling the municipal revenue raising
function from the local community's development deci-
sions" for we have seen that, in general,,such coupling
can lead to coastal zone allocations which are grossly
inconsistent with the goal we have assumed for soci,_@ty_
a Pareto-efficient allocation of the coastal zone.
In this section, we ask in what manner can.we use taxa-
tion to correct for market failures in the allocation
of the coastal zone? We.re-emphasize that the general.
question of how should one interfere with the market
.@in the coastal zone cannot be given a meaningful answer,
until one is'decided on what one wants from the coastal
zone. Our provisional assumption again is, that s,ociety
desires that allocation of the coastal zone which is
consistent with willingness-to-pay under the present,
,income distribution. Given thisassumption, we Will
.consider taxation of spillovers, or since the major.
spillover with-which we will be. concerned involve.s.
disposal, effluent charges..

Given our acceptance of willingness-to-pay, it
is.easy to state the principle by which that level of
pollution which is consistent with,wil-Lingness-.to-pay.
should be determined.

ANY GIVEN POLLUTANT LEVEL SHOULD BE ACHIEVED BY THE
LEAST COSTLY MEANS AVAILABLE. THAT LEVEL OF.POLLUTION F11
SHOULD BE ACHIEVED AT WHICH THE COST OF FURTHER REDUCTION
WOULD EXCEED THE BENEFITS 46

This will be the level which minimizes the sum of
the costs of polluting (damage to people and things,
increased production costs to downstream users., oppor-
tunities foregone, esthetic disbenefits) and the costs
of-not polluting (costs of treatment, of changing technology
or withholding production). In general, at very low pollu-
tant levels the costs of the pollution are'small, but the
costs of attaining that level are quite high and vice versa.
Efficiency demands that we find the intermediate pointat
which the sum of thesL@ costs are minimum. A necessary,

-102-

condition for level x to be the cost minimizing level
is that the cost of reducing pollution one more unit is
equal to the increase in the costs of pollution from,
moving from level x-1 to x. Or more concisely, x.will
be the point where the marginal cost of reduction equals
the marginal social cost@of the damages.

We have seen that the unaided market will., in general,
yield a higher level of pollution than this.,for the po llu-
ter does not bear the cost of his pollution. The question
then is what kind of market interference will best obtain
the desired level. Clearly, some means of 'enforcing
pollution abatement are better than others.

There are three major alternatives with respect to@
means of controlling spillovers'..

1. Direct regulation via licenses, compulsory stan-
dards, etc.

2. Payments either direct or through reduction
in collections that would otherwise be made,
such as accelerated depreciation of control
equipment and tax credits.

3. Charges or taxes based on the amount of pollution
discharged.

Almost all the present pollution control schemes
fall into thefirst category. However, direct regulation,
is clumsy and inflexible and loses the advantages that.-
can be obtained by inducing the kind of decentralized
decision-making that makes the compe 'titive market such
an efficient device under the right conditions. For,.example,
a rule that factories limited their discharges of a parti-
cular pollutant to a certain percentage of its total dis-
charge is less-desirable than a system of effluent fees
that achieves the same overall level of pollution, because
with the latter each firm would be able to make the ad-
justment in the manner that best suited its own.s.ituation.
Those firms who found it very expensive to reduce the
level of pollutants would adjust their output less.than-.
the firms who found it cheap to reduce this level.. ..,Society
would achieve the s-ame level of pollution at less,cost to
itself.

Thus, economic efficiency points to the latter two-.
categories. With respect to these, we should first.poin't
out that it is most efficient to have any system of
charges or payments based on the actual level of effluent
and not on something that is indirectly related to this
levell, such as the pui@chase of control equipment. A payment
to firms for'decreasing the discharge of pollutants is

-103-

better than a tax-.credit-on.pQllution.@,cont,ro1 equipment
because-the latter Introduces a bias:against other
means,.of,.reducing the discharge'of pollutants, such
as. a.change in-producti,on technology. Similarly, an
effluent charge on gasoline would be biased against
devices for controlling emissions during the burning.
of,gasoline.
There are two reasons for favoring charges.over
payments.:
a) There is no natural origin for payments. The
amount of payment should be based on the reduction
in the discharge of pollutants below what it would
have been without the subsidy. Estimation of this
magnitude would be difficult and the recipient would,
have an obvious incentive to exaggerate the amounts
he would have discharged before subsidy. Furth .ermore,
any potential@pollu 'ter would have to be paid a subsidy
for not building an effluent producing installation.
The problems of obtaining the information required
to dete.rmine,the amount of this subsidy,would be
prohibitive.
film
b) Subsidies will require the'raising of funds
by taxes to a much greater degree then cha ges which
taxes themselves distort the economy. Furthermore,
the distributional effects of a subsidy may be
politically unpalatable.

In short, if we are going to,be consistent.with
one of the basic principles of resource effi.ciency,
price=marginal social costs, the social co.,1-f, of
any individual's use of any resource will have to'be na
charged to this individual. Therefore, given our;basic
premises, there appears to be-a clear'-case for effluent
charges.. Of@course, such a system involves some very
rbal'implementa.tibn problems And Vill have to be care-
fully'worked into an overall coastal zone management
system.

First, it should be clear*that any system of
effluen t charges or effluent charges combined with
regulatioh'will have to be comprehensive. If ' for
example, a system was applied only to water quality the
result would be an overreliance on incineration and
industrial processes (such as the kraft pulping rather
than the sulphite system in paper making) which would
trans'fer the pollutants from the water to the atmosphere.
At least as important the system will have to@be com-,
prehensive geographically or the res-ult of the system
will be'to merely translate 'effluent producing:ac.tiviti-es to a

-lo4-

location where the system is not operative. This
will,be-especially important if control over@the-
system Is to be given'to local or even state wide
bodies.for these bodies will be concerned with
parochial benefits and developers will be able to
bargain among these bodies for favorable regulations
and levels of chargesland we will be right back where
we started from.

On the other hand, the socially desirable level
of any given pollutant, as defined above '"can vary
markedly from location to location. The social costs
of polluting a body of'water especially well suited and
developed for recreation can be much higher than the:
social costs which will arise from the same level of
pollution in a body of water unsuited for other than'.
industrial use. Hence, the cost minimizing level of
pollution and the effluent charge designed to achieve
that level can be quite.different in different'locations.*

Problem: who chooses the levels of the effluent
charges to be assessed in a certain location or equi-
valently;who,determines the socially desirable levels
of each pollutant as a function of location? Who
defines the subareas over which the desired pollutant
levels are constant? Theoretically, this should be.
done by determining the social costs associated i4ith
each level of each pollutant in each location- a clearly
infeasible undertaking. Therefore, in,practice it
will have to be decided upon by some combination of
the political structure. Some ideas on how this struc-
ture might be organized are outlined in the last section
of this chapter.

For now, we turn to the major technical limitation
on an effluent charge"system, the cost of monitoring.
Of course, any-effluent regulation system implies a
monitoring problem. However, the requirements for a.
system which will allow any polluter to pollute

Conversely, it is true that throughout any:sUbarea over
which the. desired level of a particular pollutant is
-constant, the effluent charge-oh that pollutant should
also be constant-in order to insure that the marginal
costs of reduction of all polluters,in this subarea
is equal to the marginal social cost of the pollution.
This constancy obviously simplifies the problem of
determining effluent charges considerably,foronce we
have defined a subarea we need only vary the single
effluent charge until we find the charge that leads
to.the desired level in that subarea.

_105-

at-whatever level he desires and to.change the level as
he desires--provided he pays the price--imposeasomewhat-,
more stringent requirements thanasystem which sets.@@,
,effluent st 'andards which can be@checked intermittently
at random times. An effective effluent charge
system will-require-Continuous [email protected] efflu'
ents,.and.in.particular large scale industrial:and munici-
pal operations this will be no great problem,:since
the technology is available and the costs of monitoring
,will be'small@when compared with the social-costs of
the effluent...In other cas-es, continuous monitoring
is either very,expensive at present usually due to-
the low concentrations,of interest or the.monitoring.
of ea.ch unit will be out of line with the.cost's inflicted
,sn society by that unit.' -MerclAry contamination may be ro
a case of the former and,home.heating and.auto emissions
maybe cases. of the latter.

In such situations direct regulation mdy be more,
efficient. This is a classic contracting cost problem.
As monitoring technology develops these contracting
costs will become smaller and more and more types of,@, ra
,effluents will qualify for treatment via.effluent
charges. For the time being, however, any well de-
signed effluent. control system will have to consist
of a combination of.effluent.charges andeffluent
standards. r

There is also a case for.subsidy,and this involves-,
the classic collective good, basic knowledge. Since
knowledge is a collective good@... the private market
cannot be expected to invest the Pareto-efficient
amount of resources in its attainment. In,the case
at hand, we are referring to basic knowledge con-
cerning the effects of various levels of various
pollutants on the environment and the basic technology
for rendering the various pollutants, more benign. There
is a clear cut case for public support of research
aimed at this knowledge. Thus, a comprehensive program
toward pollution would involve subsidy of basic research,
an effluent charge.sy,stem,on all pollutants for which
continuous monitoring-is efficient., and direct regula-,.,.;
tion of the remaining pollutants.

Willingness to Pay Reconsidered@
This completes our discussion of some of the individual
instruments available for coastal zone organiz.ation and
their relationship to economic efficiency- Before we
conclude with a proposal for:how these.inst,rume,nts -
might be integrated into a c.oastal zone management system,
it might be prudent to reconsider the basic limitations of
the goal we have assumed for society, consistency with
willingness to pay. Essentially, the conceptdal.(as

-106-

opposed to arguments concerning the practical.difficulties
of measuring willingness-to-pay) arguments against,
willingness-to-pay based on the present income d,istribution
emanate from two basic sources:

a) People do not know what is good for..them.
b) The present distribution of.income is.not
socially desirable.

The income distribution problem (b) has already'
crept unwanted into our discussion at several points.
However, we have yet to consider in any detail the
problem (a) - difficulties involved with basing
choices on willingness-to-pay which in turn are based
on incomplete, biased, and sometimes erroneous informa-
tion.
.This is perhaps the major concern of the environmen-
talists and ecologists. People don't know what they
are getting themselves into. At this point, we have
to distinguish between two types of lack of knowledge.
1) Things that society as a whole is unsure of, i.,e.
what is the long term effect of changing the CO
balance in the atmosphere? 2) Things that socle@yls
experts know but have not yet been disseininated to
all the members of society, i.e. what are the possible
consequences of changing CO balance and what.are the
expert's probabilities on t@ese consequences? The.
fir st type of lack of knowledge, basically the more
important, is not at issue here. it is the kind of
uncertainty that can be handled by the methods
outlined in ChapterII although, in this example,
expected value analysis is almost certainly not appro-
priate and some means, presumably based on a vonNeumann-
Morgenstern-like utility (47), will have to be developed
for Injecting society's risk adversion into the problem.

The second kind of lack of knowledge is basically
a communication or contracting cost problem and communica-
tion is costly. Hence, in many cases, the short cut of
having the experts apply their knowledge about the con-
sequences of a proposed alternative development directly
without consulting the people will be justified. This
is essentially what we outlined in ChapterIII. However
we re-emphas1ze that the role of the expert here is to
specify the consequences and not to say how much people
should value this or that consequence. It is our feeling
that the valuation be left up to the people, if they can
be efficiently informed about the expert's opinion or,
failing that, the peoples' elected representatives.

-107-1

We' f eel I
that'thls"@division betwe!en knowledge and
action upon knowledge' should be reflected inithe govern-
ment ls@org`anizatlon toward spillover's and environmental.
.consequences in general. That is, the'agency"charged:
with learning about the consequences of various actitities
should be,,divorced from the agency which1s responsible
for seeing that this knowledge is incorporated -into
the coastal zone allocation process. The advantages of
removing the first type of function from the political
arena should- be obvious and is in part reflected in the
Stratton Commission's distinction between coastal zone
laboratories and coastal zone authorities.(48),However.'.. it
appears to have-been overlooked by a significant number,
of environmentalists and -ecologists who,, in their rush
to get their knowledge before the people and have it
acted upon, have inextricably mixed this knowledge
with their own set of values or theset of values of
specialinterest groups. We feel that the public
would be bettor served if the experts would'carefully
distinguish when.they are acting as analysts '("this
in my judgment will be the outcome of thisdevelopment",)
and when they are acting as protagonists of a particular ra
value scheme.("therefore, we should not undertake the
project")

It is also clear that the experts have a clear
responsibility to make their knowledge known to the,
public. Now information is a classic example of*a
pure collective good. Therefore, we cannot expect
the private market to supply the Pareto-efficient
levels of this good. It-is clearly appropriate that
this good be provided publically and that includes.not
only the,research required.to,generate the information,
but just as important, the resources required to di's-
seminate it.* It.appears that with the possible ex-
ception.of college-level education, the federal'govern_@
ment has largely ignored the latter function. In
parti.cular, with the exception of information relating
directly to the political fortunes@of the incumbents,,
and a few.small scale efPo rts in,the public health area
the.federal government has relied almost entirely on the
private market forthe dissemination of'information to
adults.

should be clear,that if this information is to
have any-authority, it will.have to be disseminated
by the-1nformation gathering.agency rather than the
public body actually having control over the allocation.

-lo8-

This brings us to the second problem associated
with information in our society:. built-in bias.
Reliance on the private market for a collective good
such as-information requires some form of tie-in,with
a priva te ly marketed good and the private market was
not long in coming up with one. The producers of
private goods require a means to inform the consumers
of the avallability Cf. their product and its characteris-
tics. Indeed, this is a.requirement for the proper
functioning of a competitive market. It was quickly
discovered that (a) it was economic to combine the in-
formation about the project with other information the
consumer was desirous of receiving, since the marginal
costs of adding in the other information were quite
small and-this added information assured one of the
consumerts attention; (b) through the shrewd use
of psychology.one could convince a customer.who would
not otherwise buy the product even if he knew about it
and its characteristics',to purchase it. Further, and
still more important, one could distinguish one Is product
from someone elses in the consumer mind, establish
a partial monopoly and reap the non@compeititive profits
associated with this monopoly.

Of course, (a) requires that the information that
,is supplied along with the advertisement is not preju-
dicial to the product, and further (b) requires that
the information supplied along with advertisement be
not prejudicial to the customer's psychological 'r 'ecep-
tiveness of the advertisement's "message". Thus, as
a result both the advertisement and the information
accompanying it are biased. In such a situation, and
given the demonstrated effectiveness of advertising,
one may well wonder how much faith should be placed
on the resulting willingness-.to-pay? It is not in the
purview,of this report to go any further int.o this.
area but to merely note:

(a) Willingness-to-pay is clearly a function of
the information that an individual receives.

(b) As long as the information that'an individual
receives is provided by the purveyors of private
goods, willingness-to-pay will in some undefined
sense be biased toward private goods.

(c) ItJ3 notanecessary fact of life that information
in a free market society be provided through a
.tie-in with advertising. It could and, from
a collective good point of view, should be
provided publically. However, it is obvious
that if this option is taken, then very careful
controls mast be provided to prevent the infor-
mation dissemination process from becoming a
tool of the party in power. Therb.is.no a
priori reason to believe 'that'such controls
could not be worked out.

Let us now turn 'or rather,return to problem (a-), the
dependence of willinghess'[email protected] on .the present distribution of in-
come.It is a generally accepted.fac@t th,@i@ a very important
function of government' (at least'in't:he United Stat,es'in',.''
1970) 1s, to effect socially desirable income'transfers..
Therefore, it*is'only.,fair to point out.that,many''auth'brs
do not agree' with our contention that it is.useful to
separate distribution. of income considerations.from
efficiency of allocation@of 'resources considerations
in evaluating potential pijbli,c, investments.-, Some people'
feel that where distributional considerations conflict
with efficiency, the 'problem shouldbe regarded.as having-
a multi-dimensional objective., However, one cannot
extremize two conflicting'dimens*ions,.at-the same time.'
(as in the Benthamite "greatest good for the greatest'"
number"). therefore, in order to apply extremization,
which is the heart of economic analysis, one has to
assign weights to the various di mensions. Some hold
that we should go to t-he political process to obtain
these weights. ( 49,50)- Others feel that it might
be possible to infer these weights from society?'s past
decisions. (51,52,53 Still others hold@that the
weighting.exerc.is.e is not useful, and the analyst
should merely present the various descriptors dimensions
to the people's representatives resulting from each
of the alternatives analysed. (54)

With respect to these opinions,.our view1point might@
be described as philosophically extreme, but in actual
practice pragmatically moderate. Tha t is, we in essence
hold that society's desiredincome transfers should be
accomplished through lump sum of income tax social security
payments transfered rather than public investment. As
Steiner points out, this is convincing only if one.thinks
that such transfers will actually Ioccur. (55) 'That is
true., but one may well ask "if society desires the dis-
tribution of income, why isn't it taking advantage of
these relatively more efficient means of doing:it. Why@
should we have to use a relatively inefficient'_@
m.eans of,accomplishing this.redistribution? Some models
of the democratic process quickly lead to an,egalitarian
distributi,on of income (56) The qUestionis whore should
the burden of proof be? On those who hold that a rather
substantial change in the distribution of income is one
of society's goals or on those who hold that we have-the
political mechanisms to'effect the desired distribution
of income.if we really want to ? Our tendency is to go
with the latter-fully reali@zing that the actual political
animal., despite'one man-one vote, is stacked in favor of
the status-quo.

However, the real defense of.our concentration on
economic efficiency as a social goal is that it is useful.
We can learn things from-it. It has allowed us to be precise

_110- Ll

in stating in just what sense the private.mark.etcan"
be said to be@a failure and this precision-has in-turn
pointed toward certain and away from other remedies.
It has allowed us to exhibit a methodology, cost-benefit.
analysis,-through which at the very least we can rule
out suggested investments,which are inconsistent.with
any of the set of values which wouldresult,from any.
reasonable redistribution of income. Most importantly,
it has allowed us to distinguish between true economic.
benefits and parochial benefits which latter
effects are not net benefits under any desired distri-
bution of income, unless one is willing to assume.that
society actually desires a distribution of income on
the basis of geography, rather than need.* In short,@
we believe that whatever the short comings of accepting
Pareto-efficiency based on the present distribution
of income are, through this assumption we can sharpen,
our knowledge about what should be done with respect
to the coastal zone. In this respect the report will
for itself.. If at this point, the'
have to speak
reader feels he has not increased his understanding
about the coastal zone allocation problem, then
this thesis, or at least our presentation of it,
certainly remains open to question.

Summary A System for Managing the Coastal Zone

Perhaps the basic thesis of this report is that the
institutional measures that society has evolved to correct
market failures in the coastal zone usually have-not only
not corrected these failures, but in concert have often @,
exacerbated them or at least replaced them with other sorts
ofinefficiencies.Thus, present imperfection is a necessary

We should point out that this view point has been
defended on the basis that society has made such
decisions in the past. See (57). We believe that a.
more reasonable explanation of these decisions is.that
the representatives of all the people are not@respon-
sible to all the people, thus allowing.parochial
benefits expression at the federal level through log-
rolling. Furthermore ' the parochial disbenefits,
to the rest of the country were probably-not clear,
to the representatives of the rest of the country
at the time that any one such project was up for
consideration.

but not sufficient argument for an institution change.
One must also argue that the proposed change will achieve
the desired result and achieve it efficiently which
can be a much more difficult argument indeed. With,
these sobering thoughts in mind we are going to outline
a suggestion for a coastal zone management system.
While we would be the last to argue that this is far from
completely developed system is "the" answer to coastal
zone management, we do offer it as an example of a
system which is consistent with some of the principles-
of resource allocation which we have developed earlier
and one that overcomes some of the more glaring imper-
fections in the present system with respect to economic
efficiency.

The plan is not particularly original. To a large
degree it is an amalgam of ideas that have been around
for some time. However, the particular combination is
probably unique and at least it will yield a starting
point for discussion which is somewhat more developed
then the completely general guidelines contained in
present (1970) coastal zone management bills.*

The system we have in mind is outlined in Table IV.1. The
basic rationale behind this particular organization is an
attempt to allow expression of society's willingness to
pay for collective goods and avoidance of negative
spillovers while at the same time not allowing or
at -least not encouraging competition among political
sub-bodies on the basis of parochial benefits. The
key features of this plan, some of which have been
alluded to earlier, are:

1) provisilon of municipal services through user
charges,

2) a strong state level agency responsible for
defining and enforcing environmental standards
throughout the area under its control,

3) federaL approval of the state level environmental
enforced by contingent federal funding of
the state level organization.

Under this system the locality would be responsible.
for the provision of the standard list of public services:
police, sewage, access, with the exception of education.

* S3183, S2802, and S3354

-112-

TABLE 4.1

A SYSTEM-FOR MANAGING THE COASTAL ZONE

Federal

Respons:ibilities

Standards for zoning, effluent charges, regulation
Approval of state environmental plan
Standards for state C/B studies
interest rates
Non-market benefits
Environmental effects-and costs
Leave out@parochial benefits
Fund Education
Research

Enforcement Mechanism
'Federal funding of state land use/coastal zone
authority

Support
Income taxation

State

Responsibilities

Develop and get environmental plan approved
Levy.effluent charges and regulate effluents for
which continuous monitoring is ine fficient in
accordance with plan
Approve large scale projects
Acquire land and develop recreation and.co,nservation
projects.
Lease off-shore properties and license water column
Conduct and call for C/B studies in support of above

Enforcement--Mechanism
Courts., Preemptive fines

Support
Land acquisition and development: state general funds-
.0perating expenses.and studies.: state.- federal

Local

Responsibilities

Provide local public services, local zoni ng, siting of state
approved.projects

Support
User charges

_113-

These services would be suppo, rted by user charges using
Average cost prIcing IP@ne`cessary, Although the muhici-
palities would be encouraged to use marginal cost pricing
schemes.

Municipalities wQuld be free to band together for
whatever purpose- water supply, sewage distri-cts@,_et.c
for the purpose of achieving any economies of scale
,obtainable therefrom The@mdnicipality,would pay
,effluent charges to the state level and be subject to
regulations of the state le,vel. 'Local zoning would,
continue subject to meeting these re:ulations.and rn
&
charges. The locality would have c-ontrol over the local
siting of large scale, state level.approved projects
and have recourse to the courts if it opposed a-sta te
level approved project.

The state level would have the following respon-
sibilities:

1) Develop and obtain approval from the federal,.
level for a statewide environmental plan which would
set pollutant levels by-subareas which subareas would--
be defined by the plan. The plan would include the state's
territorial waters. rM

2) Levy effluent charges and/or make regulations
designed to achieve these levels. These charges and
regulations would, of course, apply to municipal as
well as private sources.

3) Lease offshor e prop erties' and. 11 c e.P s e w ate
column resources in accordance with the plan.

4) Acquire land and easements and develop re. creation
and conservation projects.

5) Conduct.and/or,callIfor costl-benefit studies.
in support of above.

The environmental plan would dividethe state.,
into a number of subareas and de signate.pollutant levels
for each such subarea. The state would submit, this plan
to the federal level plus plans for enforcing the standards
in order to Iget fe-deral support for the state level or-
ganization. Tf the plan met standard8 formulated -at-the
federal level it would be approved. The state level would
then have responsibility for enforcing the plan by levying

-114-

effluent charges constant throughout a subarea on those
pollutants for which the mon itoring require d by-effluent*.
charges is efficient and by..regulation where it is not.
Thus, the state plan would serye.as a generalized
zoning [email protected] specialization
deemed desirable. Sinee the local level would be
supported by user charges which would have to be levied
without, discrimination and the state plan could not be..
altered without federal approval , a developer would
have a hard time finding out just whom he.sells.h.is
parochial benefits to. It might be prudent to require
that the state level give its explicit approval.to
projects,above a certain size as,a safe guard,against
loop holes in the master plan withrecourse to the
courts if the developerfeels -that an unapproved
project is consistent with the master plan.'The state
level would be responsible for acquiring land for and
developing large scale recreation and conservation
projects.* The state level would have to be empowered
to perform (or require the developer of a proposed
large scale project to furnish) cost-benefit studies in
support,of the aboveresponsibilities.

The development of the statewide environmental
plan would of course involve not only the state's
coastal. zone, but also.inland portion and its atmos-
phere. We have already seen that an incomplete approach
to spillovers can result in an allocation which is at
least as inefficient as. the private market allocation.,.
Thus,.at the very least very close c,oordinationwill be
required between the state level organization concerned
with the coastal zone and the bodies with responsibility
for the air and'inland resources.

The federal level would have responsibility for setting
standards to which the state level environmental.plans
would have to conform.. This would include definition of
the set of effluents to which the state plan would have to

An unresolved problem is what to do about effluents
emitted by'state level projects. If the state collects
effluent charges, then any charges these projects pay
will be washes on the state account and at least, theo-
retically,the state will have no incentive to economize
on these effluents. There are several possibilities
for handling this such bLs, have the state pay its effluent
charges to the federal level or simply rely on bureau",
cratic parochialism. An agency which is being charged
an effluent tax which goes to the general coffers probably
will still act to decrease this tax.

-115-

address itself and guidelines as to acceptable
level's for each of these effluents by subarea land and
water use. The federal level would then approve those
environmental plans which met those guidelines. Those
states which obtained approval would be eligible for
federal support of the state level agency's operating
and analytical effort. The federal level would also
set standards for the state level cost-benefit studies.
These standards:would include interest rates, valuations
of non-market benefits, social costs of environmental
effects and requirements to insure against overcounting
of parochial benefits. The federal level would have
access to the state level cost-benefits studies and
federal funding would be contingent upon those studies
meeting federal standards. The federal level would
undertake the research necessary to draw up and update,
both the envirnmental plan guidelines and the cost-'
benefit study standards.

Underthis system, coordination between neigh boring',
states would-have to be insured by continuity requirements
in the respective plans. Thus, if the-border of two
states were a river or estuary, in order for the plans
to be approved both plans would have to call for the
same effluent levels in the bordering body and the
same level of effluent charges in the neighboring sub-
areas.

Obviously, this is a very incomplete outline of
what would necessarily have to be a very complex
system frought with a great many political and technical
difficulties. It is offered more as an exhibit in
favor of the argument that it is possible to develop
political organizations which will 'allow expression of
environmental and other non-market values while at the
same time suppressing counter productive competition among
political sub-bodies on the basis of parochial benefits.
Unless we can do both, we cannot expect an allocation
of the coastal zone which is consistent with our own
individual values.

Postscript

Drafts of this report have been criticized by
people whom the authors respect on two grounds:

1) The report is too speculative. It makes judg-
ments where conservative economics would require with-
holding judgment until our theoretical foundations are
more firmly planted, until more data is in.

-116-

2) 'The repor t is to o conservativ e. The problems
facing our coastal zone are so immense, so critical
that an attempt at dispassionate, private market oriented
,analysis misses the entire point.and amotints to nothing
more [email protected] riddled bushbeating.

Despite their conflicting nature, both of these
views are well taken. The report is overly speculative
It is.,not as closely reasoned'nor as carefully qualified
as might be desired. This is a,preliminary attempt
to explore the applicability of still developing
principles.of economic efficiency to the complex
problem'of the coastal zone. It is meant to stimu-
late discussion, not all completely friendly,,raise
problems, and mainly to try and ge@'our thinking
straight about such matters as social values, pervasive
market imperfections and.parochial benefits with
respect to the coastal zone. It is merely a starting
point and given the state of' the art a non-speculative
starting point would be no beginning at al-1. However,
the reader should be aware that we have taken some
st'ill-not-cqmpletely-developed theories and twisted
and squeezed. them in a rather violent manner in an
attempt to wring out some insights on a very complex
and,messy problem.

However, the main reason for this postscript is
to sT)eak to the second set of criticisms,for the authors
share the feeling that with respect to our employment
of the coastal zone we must do better than we have been
in concentrating on being precise about what we mean by
"better", In concentrating on being precise on how
a society in which each man is free to follow his own
.values ends up with coastal zone utilization inconsistent
with those values, in concentrating on the necessary
trade-offs and losses implied by any reallocation, perhaps
this basic conviction no longer manifests itself.

Our gu ess is that the difference between what the
life of the people in the American coastal zone is and
what it could be., fully considering all resource constraints
and as measured by the people's own values, constitutes
a tragedy of momentous proportions. We fully expect
matters to become worse,perhaps drastically worse,under
continuation of the present coastal zone management system.
We are sensitive to the fact that the difference between
our present and probable utilization of the coastal zone
and what it could be like is microcosmically mirrored
in the difference between the Chicago waterfront in
1910 and that waterfront in 1930, and yet only one man
has the vision to see the feasible potential.(58). If

-117-

this feeling does not emerge, then the report is quite
properly faulted.
However, it is also our'c'onviction that even if,
as our analysis seems to indicate we Iare seriously
misusing our coastal zone, dispassionate analysis
of why we are making @'he mistakes implied is required
before one can prescribe remedies. One must be aware
o.f the basic resource constraints and the trade-offs
involved before'one can identify a particular change as
desirableon net. One must be aware of the mechanism
through which our present coastal zone management
system makes mistakes before one can recommend ins'ti-
tutional changes. A preliminary attempt at developing
this awareness is the methodologically speculative
and philosophically modest goal of this report.

rim

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Natural History, Press, 1969.

(2) Arrow, K. Social Choice and Individual Values.
New York: John Wiley & Sons, 1963.

(3) Lancaster, K. Modern Microeconomics. Chicago:
Rand McNally, 1969.

(4) Crutchfield, J. & Pontecorvo G. The Pacific
Salmon Fisheries. Baltimore: Johns Hopkins
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(5) Ayres, R. & Kneese, A. "Production, Consumption
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(6) Kneese A. & d'Arge, R. "Pervasive External
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Analysis and Evaluation of Public Expenditures
I. Washington: U.S. Government Printing
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(7) Davis, 0. & Kamien, M. "Externalities, Information,
& Alternative Collective Action.-" The Analysis and
Evaluation of Public Expenditures. I. Washington:
U.S. Government Printing Office, 1969.

(8) "Control of Sulphur Oxides." Report of the Executive
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(9) Hardin, G. "The Tradgedy of the Commons." In:
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New York: Ballantine, 1970.

(10) Lynch, D. "The Possible City In: Environment
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(11) Demsetz H. "Contracting Cost and Public Policy"
The Analysis and Evaluation of Public Expenditures
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(12) Dupuit, J. "On the Measurement of the Utility of
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Reproduced in:. Transport. Mumby (ed.) Baltimore:
Penquin Books, 1968.

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(13) Hirshleifer, J. DeHaven, J. &'Millman, J. rim
Water Supply: Economics, TechnoloEy and Policy.
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(14) McKarn, R. Efficiency in Government Through,
S. sAnaly@iis. New York: John'WileY, 1958.
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(15) Prest, A. & Turney, R. "Cost-Benefit Analysis:
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(16) Henderson, J. and Quandt, R_ Microeconomic
Theory. New,York; McGraw-Hill,,1958.,

(17) Sawhill, I.V. "The Role of Social Indicators
and Social Reporting in Public Expenditure
Decisions". The Analysis and Evaluation of'
Public Expenditures. I. Washington: U."S.
Government Printing Office, 1969.

(18) Baumol, W. "Onthe Discount Rate for Public
Projects". The,Analysis and EValuation of
Public Expenditures. I. Washington:, U.S.
Government Printing Office, 1969.

(19) Raiffa., H. Decision Analysis. Reading,.M ass.:
Addison-Wesley, 1968.

(20) Odum, E. "The Strat egy of Ecosystem Development".
Science. 164: April 18, 1969..

(21) Pratt, J., Raiffa, K., Schlaifer, R. Introduction
to Statistical Decision Theory. New.York,,: McGraw-
Hill.5 1965.

(22) The Harbor Islands. Prepared for Boston Harbor
Islands Commission.- Massachusetts Institute
of Technology: Harbor Islands Study Group,

(23) Federal Water Pol'lution@Cbntrol Administration:
Report on Pollution of the Navigable Waters
of Boston Harbor., May 1968". In: Proceedings
Conference on Pollution of the Navigable Waters
of Boston Harbor and Its Tributaries. Department
of the Interior. May 20, 1968.
(24) Bureau of Outdoor Recreation: The__1965'_@jury@tM
of Outdoor Recreation'. U.S. Department of Interior.
October 1967.

-120-

(25) Outdoor Recreation Resources Review Commission:
The National Recreation Survey. Report 19.

(26) Mueller, E. & Guin, G. Participation in Outdoor
Recreation. Outdoor Recreation Resources Review
Commission. Report 20.

(27) Arthur D. Little, Inc. Projective Economic Studies
of New England. Prepared for U.S. Army Corps of
Engineers, New England Division.

(28) Ibid.

(29) Edwards, Kelsey, and Beck, Consultants. Natural
Resources of Massachusetts, Public Outdoor Recrea-
tion , Part II. Boston: Department of Natural
Resources.

(30) Hotelling, H. ".An Economic Study of the
Monetary Evaluation of Recreation". In:
The Economics of Public Recreation. Prescutt
(ed.) National Park Service. 1949.

(31) Metropolitan Area Planning Council: Open Space
and Recreation, Boston Harbor. II: 1965.

(32) Knetsch, J. "Outdoor Recreation Demands and
Benefits". Land Economics. November, 1963.

(33) Mack, R. & Myers, S. "Outdoor Recreation". In:
Measuring Benefits of Government Investments.
Dorfman, R. (ed.) Washington: The Brookings
Institution, 1965.

(34) Clawson, M. and Knetsch, J. Economics of Outdoor
Recreation. Baltimore: Johns Hopkins Press, 1966.

(35) Toi, T. "Projections of Recreation Demand".
Working Paper for M.I.T. New Towns Group. 1969.
(Unpublished)

(36) Kahn, H. & Wiener, A. The Year 2000. New York.
MacMillan, 1967.

(37) Massachusetts Department of Natural Resources:
Massachusetts Outdoor Recreation Plan. 1966.

(38) The Harbor Islands. Prepared for Boston Harbor
Islands Commission. Massachusetts Institute of
Technology: Harbor Islands Study Group, 1969.

-121-

(39) Frankel, E. "Boston Harbor Islands Study-r
Existing and Projected Marine'Transport'and
Marine Industrial Requirements". Massachusetts
Institute of Technology, October 28, 1968.
(Unpublished) -J

-(.4o). ..:-mo0es., L. &@Wflliamson, 'H. "T,he.Choice of
@Mode and the Subsidy Issue in Urban Transportation".
Journal of Political Economy. June, 1963.
To
(41) Camp, Dresser & McKee. Report on Improvement
to the Boston Main Drainage System. Report to
the City of', Boston.. 1968.

(42) Alexander, C.. Notes on the Synthesis of Form.
Cambridge: Harvard University Press, 1964.

(43) Krutillal, J. "Efficiency.Goals, Market Failure,
and the Substitution of Public for Private Action."
In: The Analy,si,s and Evaluation of Public Ex- ra
penditures. I. Washington: U.S. Government
Printing Office, 1969.

Vickrey,'W. S. "Decreasing Costs, Publicly
Administered Prices, and Economic Efficiency".
.The Analysis and Evaluation of Public. Expenditures.
I. Washington: U.S. Government Printing Office,
1969.

(45) Millirhan,@J.. "Beneficiary Charges and Efficient
Public Expenditures Decisions".. The Analysis
and Evaluation of Public Expenditures.
I. Washington: U.S. Government Printing.Office,
19. 6 9.

(46) Mills, E. "Economic Incentives in Air Pollution
@@Control". In:@ The Economics of Air Pollution.
Wolozih (ed.) New York: Nlorton, 1966.'

(47) VonNeumann, J. & Morgenstern, 0. Theory of
Games and Economic- Behavior. Princeton:
Princeton University Press, 1944.
(48), ..-Commission 'on*Marine Science, Engineering &
Resourc-es: Panel on Managemen-t &,Development
of the Coastal Zone. In: *Science and Environment.
Washington: U.S. Government.Printing Office, 1969.

(49) Chine ry, H. "The Application-of Investment Criteria".
Quarterly Journal of Economics. 67: February 1963.

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(50) Margin, S. Public Investment Criteria. Cambridge:
Massachusetts Institute of Technology Press, 1967.

(51) Eckstein, 0. "A Survey of the Theory of
Public Expenditure Criteria". In: Public -
Finances: Needs, Sources, and Utilization.
Princeton: Princeto n University Press, 1961.

(52) Haverman, R. Water Resource Investment and
the Public Interest. Nashville: Vanderbilt
University Press, 1965.

(53) Weisbrod., B.A. "Income Redistribution Effects
and Benefit-Cost Analysis of Government Expendi-
ture Programs". Problems in Public Expenditure
Analysis. Chase (ed.) Washington: the Brookings
Institution, 1968.

(54) Mauss, A. "System Design and the Political
Process: A General Statement". In: Design
of Water-Resource Systems. Cambridge: Harvard
University Press, 1962.

Steiner., P. "The Public Sector and the Public
Interest". In: The Analysis and Evaluation
of Public Expenditures. I. Washington:
U.S. Government Printing Office, 1969.

(56) Hagstrom, R. "A Mathematical Note on Democracy".
Econometrica 6. 1938.

(57) Gidez, R. Flannery, J. Lane, R. and Steele,
H. Procedures for Evaluation of Water and
Land Resource Projects. Water Resources Council,
197-9.

(58) Marx, W. The Frail Ocean. New York: Ballantine,
1967.

-123-

APPENDIX A

ALTERNATIVE,DEVELOPMENTS OF HULL

A.1 Introduction

T-he town of Hull was selected for study.-as an example
Of a long-establ.ished shoreline town which has tradi-
tionally provided recreational opportunities for its
year-around residents, for summer visitors, and for the-
general public. There hav 'e been amusement'par'ks and I
related activities as frequently found in beach resorts
since the latter part of the 19th century. Ih'1900
the Metropolitan Parks,Commission acquired for general
public use a substantial partof the magnificent Nantasket
beach on the Atlantic Ocean si de of town. Its holdings
now amount to 1.3 miles of ocean Pront,.about one-third
of the total. Hull has also been attractive to summer
vacationers many of whom have owned their own seasonal
homes, while others have rented cottages,or rooms. The
summer population has traditionally been much larger
than the permanent population. However, Hull seems to
be groping toward new development patterns. It seems
possible that governmental action might help the town to
accommodate itself to these patterns.and at the same time
provide greater public access to Hull's recreational
facilities for the general public in the Metrop6litan
Boston area. The object,of this particular study was
to explore these possibilities.

A.2 Geography

Geographic considerations af.fect the development
of any community to some *extent, but rarely are they as
pervasive.in their influence as at Hull. The town is
almost entirely surrounded by water. Excluding,several
islands under its Jurisdiction (Bumkin Island, 'Peddock's'
Island,.and-Hog Island) the town consists of a long narrow
peninsula. It is bounded on the east by the open waters
of the Atlantic Ocean, on the north by outer Boston Harbor,
on the west by Hingham Bay, and on,the southwest by the
Weir River and Straits Pond. At its southern extremity,
where it borders on Cohasset by land, it is tied to the
mainland by a strip only-a,few,h.undred feet wide, barely
large enough to carry-Atlantic Avenue, one of the three
roads leading out of town. The other two exits (George
Washington Boulevard and Nantasket Avenue) cross the Weir
River on bridges to tie the peninsula to routes. leading
north through Hingham and west through Cohasset. The map,

A-1

Figure 3.1, shows the general configuration.

On the open water side,'from,the Cohas-set%line near
the end of Straits Pond in the south, the peninsula
extends to the northw(@stward for about,five miles to,.,.,,
Point Allerton. At that point, the land swings sharply
to the west for about two-mile's more, ending at-Windmill
Point in Pemberton. Thusl@ thetown is about seven.miles
long. Irregularities in configuration are such that-the
total shoreline length is about 21 -miles, islands:excluded.-
Yet the'total land area (inclu"ding the'islands) is only
2.43 square miles.

The Pemberton sedtion.of the town in the north...
originally an island, is connected to the-peninsula:proper.
at Allerton by a causeway. The Pemberton and Allerton
sections are hilly, with highest elevations of about 100:
feet. There are also several small hills (50-100 f6et-
high) on'the western edge of'the peninsula and in the
southern part of the town. But,mostof the land is:low,
relief upland (10-20 feet in: elevation). There-are also@
some tracts of marshland on the Weir River estuary side
of town'. But 'most of the land is low relief upland (10-20
feet in'elevation There'are also some tracts of Marsh-
lands on the Weir River estuary side of," town. On-the :''.,
eastern (Atlantic.Ocean) side of the town there@is a ma*g-.
nificent beach about 3.5 miles long extending from
Nantasket to Point Allerton. Several smaller beach6sto
the south of this stretch bring the tatal ocean beach-@
length to about four miles.

The,geagraphy of the town is such that almost any
point is within a short distance from the water. From
much of the town it is easy to walk to the Atlantic: Ocean
beaches.. The hills afford splendid water views of.ocean,
harbor, bay,'river., or-salt pond. -Hull is dominated by A
water, a fact that has played a large part-in its past
and present development andthat will 'strongly influence'
its future*.

Second only to the dominance of water is the relative
isolation of the town from the mainland. From Pemberton:,.
to the center,of Bostonis only about seven mile's asthe
crow flies, while the a irline'distance from central Boston
to the Hull-Cohasset line is about 13 miles. But there-@
are onlythree roads le,ading from the'town@to the interior..
Atlantic Avenue runs almost due'east to Jain Jerusalem

A-2

APPENDIX A

ALTERNATIVE DEVELOPMENTS.OF HULL

A.1 Introduction

The.town of Hull was' selected for study as an example
0 a lon
f g-established shoreline town which has trad*
tionally,provided recreational opportunities for its
year-around residents, for summer visitors, and for the
general public. There hav.e been amusement parks and
related activities as frequently found in beach resorts
since the latter part of the l9th century * In 1900
the Metropolitan Parks Commission.acquired,for general
public Iuse a substantial part 'of the',magnific'ent Nantasket
beach on the Atlantic.Ocean side of.town. Its holdings
now amount to 1.3 miles of ocean.front,about one-thi:r@d
of the total.. Hull has also been attractive to summer
vacationers many of whom.have owned their.own seasonal
homes, while others have rented cottages or,rooms. The
summer population has traditionally been much larger
than-the permanent population. However5, Hull seems to
be groping toward new development patterns. It seems
possible that governmental action might help the town to
accommodate itself to these patterns and at the same time
provide greater public access to Hull's recreational
facilities for the.gen,er.al.public in the Metrop6litan
Boston area. The object ofthis particular study was
to explore these possibilities.

A.2 Geography

,Ge.)graphic considerations affect.the development
of any community to some extent, but .rarely are they as
pervasive in their.influence as at Hull., The town is
almost entirely surrounded by water. Excluding several
island s. under its jurisdiction'(Bumkin Island, Peddock's
Island,_and Hog Island) the-town consists of a long narrow
peninsula. It is bounded on the east by the open waters
of the Atlantic Ocean, on the north by outer Boston Harbor,
on the west by Hingham Bay,,Iand on the southwest by the
Weir River and S 'traits Pond. At its southern extr emity,
where it borders on Cohasset by land', it is.tiled to the
mainland by a strip only a.few hundre d feet.wide, barely
large enough to carry Atlantic Avenue., one of the, three
roads-leading out of town.. The other two exits (George
Washington Boulevard and Nantasket-Avenue,) cross the Weir
River on bridges to tie the peninsula to routes leading
north through Hingham and west through Cohasset. The map,

A-1

Figure 3.1, shows the general c onfiguration.

On the open water side, from the Cohas&et line near
the end of Straits Pond in the south, the peninsula
extends to the northwqstward for about five,miles to".
Point Allerton. At that point, the land swings sharply
to the west for about two mile's more, ending atL-'Windmill
Point in Pemberton. Thus the@tbwnis about seven miles
long. Irregularities in'configurat'ion'are sLich'that-the'
total shoreline length is about 21 miles*-, islands excluded.
Yet the total land area (including the islands) is only-
@2.43 square miles.

The Pemberton.section' of,the town in the north,
originally an island, is connected to the peninsula-proper.
at Allerton by a causeway. The Pemberton' and Allerton''
sections are*hilly, with'high6st elevations of about 100-
feet. There are also several small hills (50-100 feet,
high) on@@the western edge of the peninsula anid@in the
southern part of the town. But most of the land is low
.relief upland (10-20 feet An elevation). There are also
some tracts of mars.hland on the Weir River estuary side.
of town. But.most of the land is low relief'upland (10-20
feet in elevation). There are also some tracts of mars-h@@
lands on the Weir River estuary side of town. On the'-
eastern (Atlantic Ocean) side of the town there is a mag-
nificent beach about 3.5 miles long extending from
Nantasket to Point Allert,on. Several smaller beaches,tb
the south of this stretch bring the total ocean beach.'
length to about four miles.

The geography of the town is such that almost any
point is within a short distance from the water. From
much of the town it is easy to walk to the Atlantic*Oc-,eari
beaches. The hills aff ord splendid water views of ' oc'ean,
harbor,.bay, river,'or salt pond. Hull'is dominated by
water, a fact that has played a large part in its'past
and present development and that will strongly influe-nce,
its fut'ure.

Second only to the dominance. of water i-s the relative
isolation of the town from the mainland'. From Pemberton,
to the center of Boston is only about seven miles as'the
crow flies, while the ai'rline'distance from central Bo:ston
to the Hull-Cohasset line is about 13 miles. But-there
are only three.roads leading from the town to the interior..
Atlantic Avenue runs almost'due east to join-Jerusalem

A-2

..APPENDIX A

.--ALTERNATIVE,,DEVELOPMENTS OF-HULL

A.1 Introduction

The town of Hull was' selected for study as an example
of a long-established shoreline town which has tradi-
tionally provided recreational opportunities for its
year-around residents, for summer visitors, and for the
general public. ,There have been' amusement parks and
related activities as frequently found in beach resorts
since the latter part of the 19th century. In 1900
the Metropolitan Parks "Commission acquired for general
public-use a substantial part of.the magnificent Nantasket
beach.on the'Atlantic Ocean side of town. Its holdings
now.amount-to-1.3 miles of ocean..front,abbut one-third
of the,total. Hull has also been attractive to summer
vacationers many of whom have owned.their own.seasonal
homes,.while. others have rented cottages or rooms. The
summer population has tradi tionally been much larger'
than the permanent population. However, Hull seems to
be.,groping toward new development patterns. It seems
possible that-.governmental action might help'the town to
accommodate itself to these patterns and at the same time
provide greaterpublic acce@ss to Hull'.s recreational
facilities for the general public in the Metrop6litan
Boston area. The object.of this particular study was,
to explore these possibilities.

A.2 Geography

@Ge,)graphic considerations affect the development
of an y community to some extent, but rarely are they as
pervasive in.their influence as at Hull. The town is
almost entirely surrounded by water. Excluding several
islands under its jurisdiction (Bumkin-Island,, Peddock's
Island, and Hog Island), 'the town consists of along narrow
peninsula. It is bounded on the eas t by the open waters
of the Atlantic Ocean, on the north by outer Boston Harbor,
on the west@by Hingham.Bay, andon the southwest by the
Weir. River and Straits Pond At its southern extremity,
where it borders on.Cohas.set by land, it is tied to the
mainland by a,strip only a few.hund.red,feet.wide, barely
large enoughto carry,Atlantic IAvenue-,- one of the three
roads leading out of town.. The other. two .exits (George
Washington Boulevard and Nantask Iet Avenue.) cross the Weir
River on bridges,to tie the peninsula to routes leading
north through Hingham and west through Cohasset. The map,

A-1

Figure 3.1, shows the general configuration.

On the open water side, from'the Cohasset line near
the end of Straits Pond in the south, the pen insula
extends to the northwqstward for about five miles t*6,
Point Allerton. At that point, the land swings sharply rM
to.the west for about two miles@more, ending at Windmill
Po int in Pemberton. Thus, thetown is about seven miles
long, Irregularities in configuration are such that.the
total shoreline length is about 21 miles, islands-excluded.
Yet the total land area ('including the islands) is only
2.43 square miles.

The Pemberton section of the town in the north,
originally an island, is.connected to the .peninsula-proper.
at Allerton,by a causeway. The Pemberton and Allerton
sections, arehilly, with highest elevations of about,100
feet. There are also several small hills (50-100 feet
high) on the western edge of the peninsula and in-the
southern part of the town. But most of the land is low-'.
relief upland (10-20 feet in elevation). There are also'@_
some tracts of marshland on the Weir River estuary side%
of town. But most of the land is low relief upland (10@-20
feet in elevation). There are also some'tracts of marsh-
lands on the Weir River estuary side of town. On the'
eastern@(Atlantic Ocean) side of the town' there i's a mag-
nificent beach about 3.5 miles 1-ong extending from
Nantasket to Point Allerton. Several smaller beachies7to
the south of this stretch bring the total ocean beach
length to about four miles.

The geography of the town is such that almost any
point is within a short distance from the water-.- From
much of the town it is easy to walk to the Atlantic Ocean
beache,s. The hills afford splendid water'views of ocean.,
harbor., bay, river., or salt pond. Hul '1 is dominated by
water, a fact that has pl ayed a large part in its-past
and present development and that will strongly influence
its future.

Second only to the dominance of water is the relati ve
isolation of the town from the mainland.' From Pemberton,.-
to the center of'Boston is only about seven mile-s asthe C1
crow flies, while the.airline distance fr -om central Boston
to the Hull-Cohasset 'line is about 13 miles. 'But.there
are only three roads leading from the town to the,interior..
Atlantic Avenue runs almost due east to join @JerUsalerri

A-2

Road, a scenic route along,the Cohasset shore. To go to
Boston or t 'o the interior of the state, Hull residents
must travel in great arcs around Hingham Bay, Quincy Bay..,
and Boston Harbor. The most direct route involves exiting
southwestward via George Washington Boulevard to Hingham
and proceeding north'through Hingham, Weymouth, and
Quincy to pick up the Expressway into Boston at%the
Neponset River. This involves a trip of@something like
twenty-five miles, much of it through heavily built-up
areas. The alternative is to proceed southeastward, south-
ward, and westward on Route 2@8 and finally northward on
Route 3 and the Expressway. Total route length is about
33 miles, of which about 10 miles consists of winding'
roads through Cohasset, Hingh am,.and Norwell where high-
speed driving is impossible.

There is no rail or rapid transit service to the town.
At one time it was possible to take a street railway from
Hull to Hingham where connections were made with the Old
Colony Railroad. Both have long since disappeared. There
is a bus service from Hull to Hingham where connections
can be made with other lines to-Boston and neighboring
towns. There is also a daily commuting service by boat
from Pemberton to Rowes Wharf which. Iaccommodates some 40-
50 people daily. Departure is at 7:30.A.M. and returnl@t
6:30 P.M. This trip takes about 40 minutes each way.(
The inadequacies of public transportation are su'ch that
most Hull residents mus-t depend upon their own cars to get
them out of town whether for work or for other purposes.
Traffic surveys indicate that, even though travel time to
Boston by.private automobile must average between 40 min-
ute.s and an hour, 60 people drive to Boston to go to work
for every T.travelling by public transportation. For non-
work trips, where time and schedules are of lesser import-
ance, the ratio is less dramatic; but still the automobile
is preferred to public transportation by 3.3 to 1.(2)

The third geographic factor of importance is that Hull
has little to offer industry or commerce. The original
settlers engaged in fishing, but that no longer is an
economically viable enterprise' save for a small amount of
clamming.(3) During the 17th, 138th and 19th centuries there
was undoubtedly some farming but there is none today.
Lacking rail 'facilities and deep water, with no usable
sources of'water power, and isolated from population centers,
the town was bypassed during-the industrial expansion of
New England in the l9th and 20th centuries. Moreover, there
are no resources that can be mined.(4) Save for those engaged

A-3

in local service industries and in mercantile business,
meeting the needs of Hull's own inhabitants and summer
visitors, the people of Hull who have to work also have
to go elsewhere to find it. (5) Since there is little more
to offer in the neighboring towns of Cohasset and Hingham,
most of those who leave town to work have to travel con-
siderable distances--to Quincy, or to Boston, or even
farther.

A. 3 Hull Development Patterns--1900-1945

Given this combination of beach and water, relative
closeness to the city combined with isolation from it,
and lack of features attractive to industrial developers,
one would expect that Hull would be a natural resort area
catering both to day trippers and seasonal visitors. And,
in fact, the town developed along just such lines during
the period from the turn of the century to the end of
World War II.

By 1900 Hull was already well along the road to
development as a resort town. In that year the Metropoli-
tan Parks Commission (later incorporated into the Metropo-
litan District Commission) took over jurisdiction of part
of Nantasket Beach, opening it up to use by the general
public. In that year also there were 892 houses in the
town and a permanent population of 1703. (6) The latter paid
real estate taxes of about $800,000 while nonresidents paid
nearly four times as much (just over $3,000,000). Ten
years later the population had grown by about 25% while
the number of houses had increased by about 75%. Nonresi-
dents owned about four times as much property as residents
and contributed about 77% of the real estate taxes. (7)

This same pattern continued through 1930. The
permanent population actually had declined by 1920.
By 1930 it was almost back to the 1910 level. By
1940, it had barely passed that level. Nonresidential
construction continued to add to the number of houses
up to 1930, but with the onset of the Great Depression
building came nearly to a standstill. As we shall see,
building revived after the war, but nonetheless,
as of 1960, 73.5% of Hull's housing stock had been
built before 1939 (most of that before 1930) and 45%
before 1920. (8) Nonresidents were undoubtedly contri-
buting between three and four dollars in real estate and
personal property taxes for every dollar paid by residents
for the support of the town. Since the summer people made few
demands on the town, chiefly police and fire protection, and paid

A-4

Given

such a large share.of the cost of schools'ana general
government, Hull was a cheap place in which to live.

A.4 Growth after World War II

Beginning with World War II, the pattern of Hull's
development underwent a radical change. While only a
handful of new houses were built during the war years,
the townlsq,@opulation increased by about 56% between 1940
and 1945.( This growth represented, for the most part,
an influx of workers in the Bethlehem Steel Company ship-
yards in nearb'y Hingham and Quincy. Housing was provided
by conversion of summer residen 'ces to year-round occu-
pancy. BY 1950 the population had declined a little as
.some of"the war period workers moved elsewhere with the
dropping off of activity at the'shipyards. But at about
that time a new influx of population began with the-re-
sult that the number of permanent residents more than
doubled between 1950 and 1960. The 1969 population of
about 10,000 is nearly tripl e that of 1950 and more than
four times that of 1940.(10)'

Perhaps 1000 new homes have been built since 194o,
most of them in the period 1945 to 1960.(11) Since 1960
new construction has almost'been balanced by demolitions
of existingstructures. Accommodation'for the newcomers,
therefore, has largely been @rovided@through conversion
of older summer places to permanent homes. Nor is this
process finished., In 1950, 69% of the houses in town
were not occupied except during the summer; by 1960 this
had dropped to 47%; today, summer homes probably still
make up 30-40% of the existing housing stock.(12) Hence,
even with little or no new construction there is consider-
able potential.for population growth by adaptation of
existing housing to permanent occupancy.-

A-5 Characteristics of the Town

Hull is a working man's.town. The lower middle class
population.is almost entirely Caucasian, about 43.5% of
foreign stock or foreign born. As compared with the Boston
Metropolitan area, it has more than the average percentage
of laborers, service workers, private,household workers,
craftsmen and foremen, sales personnel, and managers,
officers and proprietors. Compared to the same standard,
Hull contributes fewer than average numbers of professional
and technical personnel, clerical workers, and operatives.(13)

A-5

In 1960 about 17% of the families had incomes over
$10,000 as compared to 21.3% for the Boston Metropolitan
Area. In that year, both the average family income ($7,350)
and median family income ($6,318) were lower than for the
metropolitan area as a whole. It is a young population,
with 43.5% 19 or under in 1960 as compared to 35.2% for
the Boston Metropolitan Area. The median number of people
per dwelling unit was 3.4 in Hull, and 3 for the metropo-
litan area. Most Hull residents live in single-family
dwellings (89.2% in 1960); most own their own homes(72.3%
in 1960). Only 4.4% of these single-family homes were
valued at $20,000 or more in 1960, as compared to 25% for
the Boston Metropolitan Area as a whole. The median value,
of such units in Hull was $12,900 as compared with $l5,900
for the entire area. On the other hand, median rents
tended to be higher ($97 per month) for Hull than for Boston
as a whole ($82).(14) The latter can be explained by the
relative shortage of multi-family dwellings and by the high
rentals obtainable for housing during the summer season;
property owners will demand a rental premium for year-round
occupancy because of the possibility of obtaining relatively
large sums for summer use only.

Hull's growth has not brought prosperity to the town.
Between 1958 and 1963 the number of retail establishments'
decreased by 28%, their sales declined slightly, sales per
capita were off by 21%, and the number of employees had
dropped by 25%. All business activity showed a decline
between 1963 and 1966. Payrolls were down by 12.5% and the
number of employees by 29%; average salaries were up
slightly from $3,340 to $4,140 (or 24% for those still em-
ployed).(15)

At the same time, the cost of government, especially
of schools, has increased dramatically. As most suburban
towns have discovered, even the addition to he tax
base represented by new construction is not sufficient to
cover the demands for services (especially schools) generated
by new families. Butin the case of Hull the problem is
particularly acute. Since 1960, new houses have meant, typically,
addition of from $15,000 to $17,000 per unit to the town tax base
During the same period, conversions of existing property to year-

A-6

round use have meant an average increase in taxable value
of the properties affected of something like $2,000-
$3,000. (18) Of course, the newly-converted homes have been
heavy consumers of town services (again, especially
schools); before conversion they had helped pay these costs
for others while making few demands on the town. Moreover
the personal property tax base, which has in recent years
run at about 10% of the real estate base, is also subject
to erosion as summer homes are converted to permanent
residence. Save for boat owners and businessmen, few
permanent residents in Massachusetts towns pay personal
property tax because of a generous exemption afforded each
household. Since it is presumed that summer residents are
taking advantage of this exemption elsewhere, it is stan-
dard practice in resort communities to assess these prop-
erty owners for personal property as well as real estate
taxes. As summer homes pass into the hands of year-round
residents, therefore, the personal property assessments
must drop off. Finally, the steady demoliton of older
properties in recent years undoubtedly reflects the impact
of constantly increasing taxes on owners of deteriorating
summer properties that might have been under other circum-
stances, patched up and kept on the tax rolls.

Another problem needs to be taken into account. A few
of the hilly sections of Hull installed sewers many years
ago which discharge untreated waste into Hingham Bay and
the Weir River. The rest of the town depends upon septic
tanks and cesspools located on the building lot to take
care of sewerage. The town is now under order by the
Commonwealth to install sewers and a treatment plant to
stop the serious pollution of the bay and the river. Ulti-
mately, it will be necessary to tie the homes now depending
on domestic waste disposal systems into the municipal
sewer. Even though most of the soil is sandy, the domes-
tic systems have always been hard-pressed because of the
heavy demands put upon them by the large summer popula-
tion (estimated at 40,000 people not counting day visit-
ors)(19) and the small lot sizes (mostly 5,000 square-
feet). Now, with constantly increasing year-round occu-
pation of homes in the summer resident areas, problems
from overflowing cesspools and septic tanks have become
of increasing concern to local health officials.(20)
Even with state aid, construction of the necessary sewers
and treatment plant will represent a heavy cost to Hull's
taxpayers.

A-7

A.6 Recent Trends

Most of Hull's residents have moved into the town
since World War II. They came to hull because the town
offered a combination of cheap housing and excellent sum-
mer recreational opportunities for adults and children
alike. Lack of local business and industry meant that
most of the new inhabitants had to face long daily commu-
tation stints. The town lacks modern shopping facilities.
During the summer season the residents of Hull put
up with crowding of the streets and beaches. As has been
noted, the summer population climbs to about 40,000 people.
This does not count the masses who stream in by bus, pri-
vate automobile, and steamer to enjoy the public beach
at Nantasket and the nearby amusement park area. It has
been estimated that on a hot summer weekend day this in-
flux may amount to 60,000-80,000 people. The resulting
traffic jams sometimes get so bad that the police are
forced to impose an embargo on any further traffic into
town on such days. (21) But--considering the benefits--the
inconvenience of long commuting trips, of going elsewhere
to shop, and of occasionally horrendous traffic snarls
seemed a small price to pay.

Moreover, there was no comparable alternative avail-
able to the newcomers. The nearby shore towns of Hingham
and Cohasset had much less to offer in terms of recreation,
while real estate prices were perhaps double or triple
those for Hull. (22) Farther to the south, Scituate and
Marshfield did offer somehwat similar recreational oppor-
tunities, but at an even greater distance from Boston in
terms of road miles and probably of time as well until
the opening of the Southeast Expressway. While these towns
have also experienced rapid population growth, partly
through conversion of existing summer homes, zoning regula-
tions have been tighter and lot size requirements greater.
The result has been that real estate costs, while much
lower than for Hingham and Cohasset, have tended to be
considerably higher than at Hull.

The problem facing the people of Hull has become one
of wondering if they will be able to stay there. The taxes
on a $12,900 house owned by a family with an income of
$6,318 (the median values for 1960) were $555 in 1960; by
1968 they had risen to $890, with the end nowhere in sight.
It is doubtful that the median income had experienced any-

A-8

thing like the 60% increase in real estate taxes. In 1950
the average Hull:taxpayer (resident and nonresident alike)
had turned over-$24o to the Collector ofTaxes; by 1960
the bite was $465; in 1968 it was $775. By 1968 it was
0 ting the town abo@t $600 per child for education (sala-'
ries, expenses, transportation) not counting new building
(23) The average taxpayer with children in the-
expenses.
schools was not coming close to meeting the costs of educa-
tion of his family, let alone his share of other services.
The flywheel of nonresident tax payments was chiefly
responsible for keeping the situation under some degree of
control., but, as has been shown above, that flywheel was
losing momentum.

Projection of past trends presents;an even grimmer
picture. Let us suppose that Hull should attempt to con-
tinue to develop as a lower middle class bedroom community.
This would mean building-single-family homes on all cur-
rently vacant land and finishing the job of converting
all summer homes to year-round occupancy. What effects
would such a development have on the town?.

Let us assume that a developme nt patt ern of this sort
would have the:following results. Five hundred new homes
would be built at an average value of $17.1500, cIdding
$8,750,000 to the tax base. Tw6,thousand summer residence
units would be converted to permanent homes at an average
cost of $5,000 each, adding,another $10,000,000. About
$2 3.
.,750'000 in personal property assessments would be
dropped'fro'm the rolls with the elimination of the summer
residents, even after taking account'of increases in per-
sonal property taxes levied against new boat owners and
new small business ventures. 'Let'us also assume that new
busi'nessqs add $5,000,000 to the real estate property tax
base. 2

Given the above assumptions, there would be a net in-
crease of $21,000,,900 over the'present $45,000,000 personal
and real estate tax base. The population would probably
double. The costs of local government-would at least
double and more than likely triple..(25.) If they doubled,

A-9

the annual tax levy would amount to about $6,300,000 to
be raised on a base of $66,000,000. This yields a tax
rate of $95.50. If they were to triple, about $9,500,000
would have to be raised against the same base. This im-
plies a tax rate of $144. If we assume an average home
value of $15,000, the Hull citizen could look forward to
a tax bill of $1,430 in the one case and of $2,180 in
the other.

Recognition of this unpleasant set of facts has led
the people in recent years to try to change the direction
in which the town is moving. In 1961 the town estab-
lished an Urban Redevelopment Authority (the first such
at the town level in the entire country). While progress
has been painfully slow, plans have been drawn up for
redevelopment of a badly decayed business and residential
area near the MDC public beach. Federal funding was ob-
tained to support the necessary planning studies and final
approval is pending for a Federal grant to clear the area
of existing buildings and thus open_it up to development.
The necessary zoning changes have been approved by the
town. The plan contemplates construction by private inter-
ests of a 100 unit motel, two 100-unit apartment units
(1 and 2 bedrooms), a shopping plaza, and a marina. The
motel and apartments will be on the ocean side, the marina
on the bay, and the shopping plaza more or less centrally
located. It is anticipated that the apartments and the
motel alone will add more than $4,000,000 to the tax base.
Construction of the marina will await the necessary dredging
and elimination of pollution in the Weir River; its anti-
cipated value has not yet been costed. (26)

The redevelopment project includes additional public
parking nearthe beach on the northern end of the project.
(The motel, apartments, and marina are to have integral
parking.) The shopping plaza will have access to a re-
served section of the MDC parking lot. the 407,000 square
foot lot will provide space for perhaps 1,400 cars; only
several hundred can be presently accommodated in this
general area of the beach under present arrangements.
Jurisdiction over the town beach in the area has been trans-
ferred to the MDC, giving it about 1.3 miles of beach as
compared to 1 mile formerly.

A-10

Thus, in its urban renewal program the town has moved
to add to its tax base without incurring heavy costs for
schools and other services. One- and two-bedroom apart-
ments are generally not associated with large families.
At the same time, it.has increased public access by non-
residents of the town to Nantasket Beach. Once this
project has been successfully completed, further renewal
efforts are-planned to revitalize decaying commercial and
residential areas in the general vicinity of the public
b'each.(27)

Over and above the urban renewal programs, Hull has
undertaken an effort to upgrade the town through zoning
changes which were approved by.a special Town Meeting as
recently as 20 October 1969. The new zoning by-law opens
up the last major tract of vacant land in the town (exclu-
ding the islands) to gard6n apartment development (l or 2
bedrooms). A long stretch of the oceanside north of the
redevelopment area has been rezoned to permit construction
of hotels, apartment houses and town houses, and associated
services such as restaurants. Another large tract on the
bay side has been similarly zoned; this area could attract
marina developers as well as hotels and multi-family
dwellings. As before, the multi-family dwellings in both
areas are to be restricted to 1- and 2-bedroom units. Two
smaller areas in the more northern parts of town and the
two larger islands are similarly zoned. Other sections
have been zoned for various types of business or commercial
enterprise or for multi-family dwellings, while about hal
of the town remains zoned for single-family residences.(2

To make the plan work, lot size requirements have
been altered. Lot sizes for single-unit residences have
been changed from 5,000 square feet to 6,500. This just
about rules out rebuilding on most existing lots. On the.
other hand, two adjacent lots can be combined to meet the
minimum requirements of 10,000 square feet for multiple
family dwellings. Coupled with these basic requirements
are restrictions on lot coverage and requirements for set-
backs and parking that are designed to provide for open
space.(29)

Thus, it is Hull's hope that it can capitalize on its
unique location by encouraging the development of improved
seasonal facilities such as hotels, motels, and marinas,
and by fostering the construction of multi-family housing
@'-designed to appeal to people of a higherincome bracket

A-11

and smaller family size than the present norm for the town.
To accomplish,this it has opened up some of the prime land
in the town to such commercial development and made it
difficult3 over the long run, for these areas to remain
primarily dedicated to single-family residences.

The impact of this scheme, if it works., should be to
provide a substitute for the summer resident in terms of
contributing to the costs of running the town. The new
enterprises will add to the tax base without creating
the kind of load on the schools tha t is associated with
single-family dwelling development. The development of
controlled commercial recreation in prime areas now mostly
zoned for single-family residences will also afford some
increased public access to Hull beaches and waters. How-
ever, this will not be mass recreation of the sort found
at the Metro@politan District Commission (MDC) beach and
its associated commercial amusement area, but the type
which might attract high income, low number of,children
families. In short'. Hull is attemptling to find a way to
permit its present population to keep their homes by
attracting higher income residents and visitors.

In our opinion, it is not clear that, even given this
limited objective, Hull's present plans will be successful.
There is no doubt about Hull's uniquely attract4ve geo-
graphy, yet except for the marina the plan takes little
advantage of it. The results for whalch they are hoping will
be another example of the uninspired:garden apartment-shop-
ping center complex which could easily be built and has
been built almost anywhere in suburban Boston.@ Such devel-
opments attract young', small, but hardly high Income
families and, in fact, development a 'long these lines will
make it more difficult to attract high income residents in
the future.

Further, the plan does not attack the key problem in
attracting high income residents and recreatibn which is
transportation to Boston. High income-, low number of child-
ren people are urban dwellers or persons with easy access
to urban areas for employment and recreation. Hull's major
problem from the point of view of t.hies.e people is getting
to Boston. If one could get to downtown Bost.on in, say,
20 minutes with reasonable schedule frequency, then a
whole spectrum of opportunities arisle: high-rise residence
development, townhouses, hotels, re,sitaurants and nighttime
recreational facilities catering to'Bostan res,idents " etc.
Hull could easily become the new outlet for Bost-on's
burgeoning demand for high income, Urban residences. Until

A-12

the transportation problem is solved., Bull, despite its
unique geography, can at best expect to be a poorer
version of the communities surrounding it to the south,
which have more land and better access to Boston, for
Hull will always be crowded by suburban standards.

We further feel that if Hull's transportation prob-
lems are to be solved it will be by taking advantage of
the short over-the-water distance to downtown Boston
either through conventional vessels, hydrofoils, or ground
effect machines. It may very well pay the present resi-
dents to subsidize such service on the grounds of future
effects on property values and taxes. (This argument is,
of course based on parochial.benefits.) Hull does not
appear to'have investigated this possibility and neither
have we. Our basic point in this section is to demon-
strate that, whatever decisions Hull makes as a political
entity, they will be only remotely related to economic
efficiency.

A-7 Hull as Part of the Region

Thus far in this discussion we have been proceeding
as though the Town of Hull were largely free to conduct
its affairs in a manner that the inhabitants as a body
think will best suit their own interests. Given that
this is a free enterprise system and that the town retains
the pure democracy of the open town meeting, there is a
certain amount of truth to this implicit assumption. None-
theless, it is important to point out that there are con-
straints operating which limit Hull's fr eedom of action.

The power to force development in desired directions
by zoning regulation, for example, is derived from the
Massachusetts legislature and is not inherent in the cor-
porate charter (which also was of legislative origin).
Arbitrary or discriminatory use of this power could lead
to le islative withdrawal or modification of zoning author-
ityINO) The urban redevelopment process is dependent upon
approval and-financial support from the Federal Government
as well as action by the citizens of Hull. The urban
redevelopment process has enacted legislation requiring
the cleaning up of polluted waters; as a consequence, the
Commonwealth has ordered Hull to construct sewers and a
treatment plant to eliminate its present pollution of
Hingham Bay and the Weir River. Hull will receive some
financial aid from the state in this endeavor, but it has
no choice in the matter. By 1972, the present pollution
must cease.(31)

A-13

Hull's. chief assets are the wa@,ers of the bay and
river and.the,great beach on the Atlantic Ocean. Optimum
development on the bay side will require dredgingfor the
construction of marinas. This cannot be done without
approval by the Army C-orps of Engineers, If development
in the Weir River estuary will require the filling or
draining of some of the existing marshland., this cannot be
done without prior approval from the Massachusetts Depart-
ment of Natural Resources. Hull's beach is publicly owned.,
about two-thirds by the town and one-third by,th-e Metropo-
litan Distr,ict Commission, an agency, chartered by the
Commonwealth. The town can exert s6me degree of control
over parking regulations directed against nonresidents.
The MDC area is open to all comers who can find means of
transportati.on to the area. The MDd provides its own police
force for the reservation, as well as lifeguard and main-
tenance services. Hull not only has no control over the
area., it even pays an annual,assess@ent to support the MDC
M,
operation.. This amounted to about in 1968, for
example.(32)' When automobilatraffic becomes so heavy as
to.threatan chaas as the result of Preemption of all-legal
and illega:l.parking spaces and very heavy congestion in
the street,s-,. the Hull police can exert some control by
imposing an embargo on further incoming traffic into the
town. Such measures are adopted only rarely, however.

Another factor affecting Hull's des,tiny, yet beyond
its control, is the lack of go,od lahd transportation into
the town. There is no rapid transit service to Hull nor
do plans for southward extension of-thO MBTA lines call
for,service-to the town. Barring development of improved F1
transportation by water., Hull must continue to depend upon
bus service: and the private automobile. This means reliance
upon two of the three roads leading out of town. There
has been.discussion for years of an',improved road to the
north more or less along the shorelipne..to be known as
the Shawmut Trail. Intense oppost.on on the part of Hingham,
Weymouth', Quincy, and Braintree thr6u gh which the road
would have to pass has apparently mc@ide this proposal a dead
issue. Hull's other hope lies in dbvelopment of a new
limited acce-ss, high speed highway @o replace the present
inadequate Route 228 as a link to the Southeast"Expressway.
As a resolution adopted during a Special Town M beting in
November 196,8 stated, this road is "the economic lifeline
of the Town of Hull" and action to accomplish-its reloca-
tion should,be started "as soon as possible."(38) But
the towns through which it will havb to pass, notably
Hingham and.Norwell, have done everything possible to delay
and frustrate the laying,out and construction of this new
road-.

A-14

To summarize, Hul 1 has exercised local initiative to
attempt to force new development patterns that will reverse
the recent trend of costs rising much more rapidly than
the supporting tax base. As the Chairman of the Hull
Planning Board put it in urging enactment of the new zoning
regulations3 all Hull'has to sell is the water. This., he
said., is "liquid gold." The town owns "the finest beach
from here to Florida." To expand the tax base it is neces-
sary to give developers an incentive to develop the water-
front. Hull, he further noted, is at a "point of no return."
"Look at your tax bill," he cautioned. The rezoning was
designed as a rrm@ney proposition" to "make money for the
Town of Hull."(3 The same general line of argument
underlies the urban renewal effort, though the techniques'
employed are, of course, quite different.

But, in the last analysis, Hull's success or failure
in achieving its objectives will depend heavily Upon
forces outside its control.. If the necessary Federal
funds from the Department of Housing and Urban Development
are not forthcoming, the urban renewal project will never
get off the ground. If better transportation links with
the interior and with Boston are not provided, there will
be little incentive for private capital to take advantage
of the new opportunities presented by the revision of the
Zoning By-law. The recent expansion of the MDC area may
lead to a modest increase in public recreation usage of
Nantasket Beach, but Hull's plans do not call for maximum
usage of its assets in the general public interest. Rather3
they represent a blend of local and regional interests,
with the accent--naturally enough--on the local.

What are the parochial benefits and costs to Hull of
the annual summer incursion of nonresident inhabitants
and day-trippers? The following are at best crude esti-
mates but they are probably accurate within 10%. The
chief contribution is, of course, in tax payments. As
late as 1968 nonresidents and businessmen whose chief
activity is related to summer trade probably accounted
for about $250,000 of the $276,000 in personal property
levy. The same groups probably contributed something like
$1,6003000 of the total $2,878,000 real estate tax levy.(35)
In both caseS3 the chief contribution is derived from the
ononresidents, with relatively little attributable to
thos,e catering wholly or primarily to day-trippers.

The next big item to be considered is summer emplo
ment, which in July is twice as large as in Novemb,er.M-)
Assuming the same general pay scales, this would mean a

A-1_5

payroll of about $600,000 for the si@mmer season. Not all na
of this would go to Hull residents, of course, but we can
assume that perhaps $400,,.00,0 of it would. Hull' r.e@eives
about $40,,000 a year from licenses and permits 07 perhaps
$30%bbo of this.is attributable to summer business.
Parking meter fees adZI up to about $2,000; these are wh .olly
related to summer activities,, since:the meters are in
operation only during the summer moriths. Probably about
$9,000 of the $12,500 received in fines and forfeitures
from the Plymouth County Court are Llso derived from sum-
mer offenses, especially parking and motor vehicle
violations. _U

It is clear that the nonresidehits provide a major
part of Hull's municipal income. What do the summer in- U
habitants add to the costs of running the town? Since
they own about half of the property, we will charge them
for half the costs of the tax collector and the assessors,
or $21,700. Extra police hired for'the summer cost $21,500. U
Police protection during the summer, and of their unocc.u-
pied property during the winter, shbuld account for about
$50,000 out of the total of $.268,00b for the Folic,e Depart-
ment. Marginal fire protection costs, summer and winter,
are estimated at $175,000 out of a total Fire Department
cost of $382,000. Beach Patrol and Harbormaster add up
to $11,000. Beach cleaning tacks on another $11,000. Out
of a total recreation and related item budget of about
$45,000, we will charge the summer residents with the
entire summer recreation budget of $11,000. Their prorata
share of the costs of trash collection amounts to $303000
out of a total of $71,000. This assumes no economies of
in garbage Qollection. All of the iabove adds up to
$311,700.0d)

This figure represents less th 'an 6% of the total cash
budget for the year and less than 115% of the total raised
by taxes on real and personal estatles. But this group
probably paid about 51% of the real: and personal taxes
directly-; if we add in the contributions from businesses
largely dependent upon their support, their contribution
increases to about 59%. The nonresidents are still, ob-
viously, a great asset. The one-day visitors may not be,
though they certainly generate some income to the local
residents and some revenue to the town as noted above.

Hull pays the MDC about $47,0-00 a year as its share
of supporting the Metropolitan Park System. In return,
the MDC provides police services, lifeguard protection,
beach maintenance, and trash collection in its area. The
MDC pays Hull about $6,000 for the use of its dump for

A-16

disposal of refuse.(39) Were Hull to have to provide the
services now furnished by the MDC, the costs might be
about as great as the present-assessment, assuming the
same ge'he al public' access as at present. Under these
conditions the direct costs and benefits would appear to
be a wash, while the town does derive other benefits from
the employment and taxes derived from businesses directly
supporting thoseenjoying the use of the beach and the
nearby commercial recreational facilities.

On the other hand, had the MDC reservation never
existed and had the 116-acre area been developed for pri-
vate commercial and residential use, the Hull tax base
might be about 10% larger than it now is. In 1968 this
would have meant an extra $41500,000 to be assessed; if
$2,500,000 of this represented nonresidential and commer-
cial property, the 1968 tax levy might have been on the
order of $3,300,000 instead of $3,155,000 and the tax
rate $66-50 instead of $69. The average household would
have paid about $25 less in taxes to the town. It is not
certain that the citizens of Hull feel that they derive
$25 worth of benefits per household from summer invasion
by hordes of steaming humanity by boat, bus, and private
automobile with the consequent crowding of beaches, stores,
restaurants,, streets, and highways.

A.8 Increased Public Use of Hull's Beaches

Hull's preferred development pattern, if it can be
made to work, will lead to a higher population density
both summer and winter than now obtains. But it is not
clear that it will lead to greater usage by the general
public of the day-tripper variety. On hot summer weekend
days the beaches are already crowded to an almost incredible
degree. While the limit would seem to be parking space,
this is true only so long as people obey the parking
regulations. According to residents, on peak summer week-
end days the visitors park wherever there is space, on
public or private property (if un@ef3nded), paying no
attention to posted restrictions. 40 Some feel that pay-
ment of a $10 parking fine fo a day on the beach with
their families is worthwhile.@41)

A number of officials have confirmed the seemingly
fantastic estimates of a daytime population (including
residents, summer visitors, and day visitors) of more than
100,000 people on such days. The density on the beach is
such that the people who live there., or are staying there
for the summer, remain at home. Even so, there is not

A-17

even room to put down a blanket.(42) iOn such accasions
the beach loading becomes comparable to that at Coney
Island, with perhaps as little as 10-15 square feet of
dry,beach space per person, as compared to accepted
recreational standard,s of 75 square feet per per-'@&on..

Indeed, as the new zoning regulations take hold, the
general public may find its access to the beach actually
reduced. The hotels,, motels,, and luxury apartments will
have their own off-street parking, and access to this will
be strictly c.ontrolle.d presumably. Moreover, as high
income producers to the town., they may'. well be in a posi-
tion to demand and-receive support from the police in the
form of traffic control and strict regulation of@'parking
on the street,s, since the attractiveness of their devel-
opments depends upon a free flow of traffic.

It might be possible to increase public usage of the
beach in the newly-zoned area by-constructi.on of parking
garag,es back from the shore. However 3. it is not certain
that such an operation would pay.. There is no shortage
of free parking in Hull during the non-sum-er months.
Thus, a parkling garage would have to depend upon a summer
season of about 100 days to meet all expenses.

Estimated cost of a gara I e holding about 440 cars
would be about $1,400,000.(43@ At 5% for 20 years this
could be amortized by an annual payment of $113,00-0. F1
Maintenance, labor, insurance, and so.on., might add
another $37,000 in annual operating.c6sts, bringing the
break-even point to $15,0,000 per year *@ On average, there
will be 70 weekdays and'30 Saturdays, Sundays, and holidays
during a 100-day season. If the garage is open 12 hours
a day, we can assume. 125% utilization on the weekends and
holidays and perhaps up t,o 100% on the weekdays. This
works out to 47,300 (car-parking) day@ during the season.
If a flat fee were to be charged, it would require about
$3.25 to cover capital and operating...expenses, neglecting
taxes and profits. Assuming an assessment of $1,000,000
and the 1968 tax rate, taxes would add about $70,.000
annually. Assuming a gross profit of:about $30,000 is
required by the entrepreneur, the total annual costs would
come to about $250,000. This implies a parking fee of
about $5.25 if a flat rate were to be charged.

Presumably, people would be willing to spend.more for
parking on weekends and:holidays than'@they would in mid-
week. If the charge for the premium days were set at $7.50
and for the others $4.00 and if the utilization were as

A-18

postulated, the garage would meet all expenses, Including
taxes., and pay the suggested profit. It is not entirely
clear, however, whether people would pay this much or if
the suggested utilization factors could be realized. If
we assume an interest rate of 10% and a fifteen-year write-
off, the annual capi@al charges become approximately
$184,000. Leaving all other costs as before, the garage
will have to clear about $320,000. This implies a flat-
rate parking fee of nearly $7.00. Alternatively, weekday
fees of $5.00 and weekend fees of $9.00 would provide the
required income. It is even less clear that people would
pay this much. The conclusion, therefore, is that parking
garages do not appear to be an attractive business propo-
sition.

Even if we assume that additional parking facilities
could be made to pay (whether publicly or privately owned),
there is a limit to the number of people that Nantasket
Beach can accommodate. And that limit is already approached
or exceeded on hot summer weekend days. The fact that a
public beach and (currently) free public parking exist at
Hull acts as a magnet to draw the inland population to
the town. When they find that so many others have had the
same idea,that there is no more legal parking and no more
room on the public beach, the natural reaction is to in-
trude on areas nominally reserved for the residents of
the town. The mere existence of general public facilities
gives these out-of-town visitors the feeling that they-
have a right-of-access to the beach. Having gone to the
trouble to get there, they are not ready to turn around
and go home again, even though this may mean affecting
the rights of others.

Paradoxically enough, the natural conflict between
local and regional interests is sharpened, not lessened,
by dedicating part of a scarce resource to general public
use. Hull's residents undoubtedly feel that they have
done a great deal for the general public in turning over
more than a third of the town's beach to them. They resent
movement of outsiders into areas reserved for those who
live in the town. They receive important disbenefits in
the form of traffic *' confusion, and so on, even when the
day visitors keep to the MDC area. They feel that they
should be left free to enjoy the rest of the beach, since
it is the possible use of the beach that has led them to
buy homes there or to pay heavy summer rentals. As noted
above, the out-of-town visitors care little about such
niceties. They want to go to the beach, period.

A-19

When the population pressure was 16ss this conflict
was not so sharp,. Few people lived in the town permanently.
They undoubtedly received benefits, either directly or
indirectly, fr;om the money spent in the town by the visitors
to the MDC area. Most of Hull's development took place
before 1920., in the pre-automobile era., Thus, it was not
easy for those using the MDC beach at Nantasket to intrude
in great numb.e:rs on the portions of the:beach used by resi-
dents. Now, with a larger population demanding access to
the shore and with the mobility resulting from widespread
ownership of automobiles, the picture has changed.

Where the local interests involve only a handful of
people it is p-ossible to resolve such conflicts by expro-
priat.ion in thie name of the higher general good. This was
done on Cape ic"Od when the National Seasihore was established
there. It might happen some day in towns such as Duxbury
where a beach as good or bett.er than Hull's is largely
re'stricted to pure'ly loc,al use. In casie,s such as these,
general -regi.onal planning can proceed almost as if -no
local interests are involved, as if the development were
starting'from scratch. But, in cases like that of !Hull,
where the local interests are substantial and where provi-w-
sion for the general interest has already impo,sed real
costs on the local inhabitants, the ans1wer to regional
problems would appear to lie in sympathetic attempts to
make the best.@possible adjustments of the pres.ent conflicts,
not in impos.-Ing new usage patterns from on high.

If Met-rop7oli@tan Boston is goingtQ need more and
better public'recreation facilities, it,- will not -be able
to squeeze them out of towns like Hull. The answ,.er will
almost certainly have to be found in the creation of brand-
new recreational opportunities in areas 'now not so employed
at all or available only to a handful of the peopl-e in the
region.

A.9 Possible 'Governmental Roles

Hull is already obtaining Federal assistance in its
urban redevelopment effort's. The state: (Metropolitan
District Commission) provides police ar@'d maintenance ser-
vices in the part of the beach under i@s jurisdiction,
though Hull,does have to share in some.of the costs of
this operation. (It paid a levy of abbut $47,000 in 19:68.)
The state w-111 also share part of the costs of-:t.he new
sewage system which it is requiring Hull to install. There
seems to be lAttle else that government can do t-o assist

A-20

Hull in solving its problems or to provide better access
to Hull's facilities for the general public. As noted,
those facilities are already used t.o near capacity much.
of the time, and reach,a saturation point on occasion.
One possible exc@ption is to be found in the two
uninhabited islands in Hull Bay. While Hull's new zoning
ordinance contemplates development of these for commercial
recreation, it may be that they could be put to better
use.as part of an integrated public recreational develop-
ment of the Harbor Islands. Should this be done, it would
be desirable to provide Hull with some compensation for
the acquisition of these potentially valuable assets.
Also, it would seem only fair to plan the financing and
operating of the project in such a way that Hull was not
expected to pay a major contribution towards the costs
simply because the islands lie within its political
juri,@diction.

A.10 Conclusions,

Hull's potential is already being fully employed,
or nearly so, during much of the summer season. On hot
weekends the beaches and roads become saturated to the
extent that the local police have to embargo any further
automobile travel into the town.

While more recreational facilities are badly needed
in the general metropolitan area, it is not easy to see
how these can be provided at Hull short of tearing the
whole town down and transforming it into a public reserva-
tion. This would be politically impossible and economi-
cally inefficient. Hull aready suffers a great deal of
inconvenience-, and some costs, as a result of-the summer
invasion of hordes of day-trippers. While the nonresi-
dent homeowners more than pay their way, it is not certain
that the town receives compensation from those using the
MDC beach commensurate with the inconvenience and other
indirect costs incurred by the residents (both permanent
and summer).

It is always difficult to balance regional and local
interests, perhaps especially so at'Hull. It would be
difficult indeed to convince the people who own property
at Hull that.measures to provide even greater public access
to their resources would be to their benefit. Where such
resources are so controlled by local private or public
owners that they are grossly underutilized in terms of the
larger need, good arguments can be made for taking the
property with compensa@ion. Since Hull's beaches are already

A-21

used by a very large number of nonresidents, this argument'
does not hold for further public development there. Any
further increase in the us@e of Hull by nonre-sidents
(Peddocks Island and Bumkin Island excepted) could only
serve to lessen the advantage of the'town to the residents
without granting them'any compensating benefits. The
townspeople and their elected officials could be expected
to resist any such plan strenuously land effectively.

Through redevelopment and new zoning, Hull is
attempting to cope with a serious cost of services problem.
The old character of the town as a bu:stling resort domi-
nated by single-family summer houses and practically empty
in the winter is changing. The conversion of summer resi-
dences to year-round homes increases;the costs of services
much more than it does the tax base. Present residents
are asked to subsidize the education of incoming children.
Hull has instituted plans.to attract high-income ., small-
family households by encouraging apartment construction
and rezoning. It is not clear that these plans take
sufficient advantage of Hull's geography or suffi'cient
cognizance of the importance of acce;
8s to Boston.

In summary, the decisions made by a locality such as
Hull are based almost entirly on par6chial effects.. They
.are divorced both from the discipline of the private market
and from considerations of regional welfare. Their value
and efficacy depend almost entirely on the imagination and
wisdom of a few town leaders who often represent@special
interests within the locality itself and rarely command
the technical training or experience to see the locality
as part of the region nor the financial powers to implement
plans based on such a viewpoint.

ITH

A-22

APPENDIX A FOOTNOTES

1. Information provided by Mr. John Tierney
of HullRedevelopment Authority staff.

2. 1968/1969 Transportation Facts - Boston
Region (4ereafter cited as Transportation
Facts).

3. At present Hull'-- clam flats are closed
because of pollution.

4. There is sand on the beaches and offshore,
but any-mining of this would be strongly
resisted by the town, the metropolitan
District Commission, and the State De-
partment of Natural Resources.

5. "Land Utili7ation and Marketability Study,
Town Center Project #1, Hull, Massachusetts,"
(9 October 1967), prepared by Giroux and
Company for tho lf!i2l Redeve2opment Authority.
(Hereafter cited as Giroux)

6. Data on number of houses is to be found in
the assessors reports in the Annual Report
of the Town of Hull. for the-year cited.
Population data are from the Annex, unless
otherwise noted.

7. Through 1910 the annual assessors reports
broke the assessments into resident and
non-resident categories. Later estimates
based on numbers of houses, population,
and (for 1920) examination of published
list of value of properties which showed
about four times as much property in the.
hands of non-residents as belonging
to residents.

8. See Giroux.

9. 1969 population estimate from Hull Redevelop-
ment Authority.

10. Therewere 3106 houses in 1939 and-3163 in 1946.
In 1968 there were 4076. There have been perhaps
100-200 demolitions during this period-as well.

11. See Giroux.

12. Ibid.

13. Ibid.

14. School costs taken from Annual Reports.

15. Assessment data from Annual Reports.
16. Based on analysis of build,ing permits
data in Annual Reports and,interviews
with Mr. John Tierney of Hull Redevelop-
ment Authority.

17. The 4o.000 figure appears in the report
of the Board of Health - H6alth Agent
(Annual Reports 1966)., Mr. John Bray
a longtime resident and Executive Director
of the Hull Redevelopment Authority, believes
that the summer population is more likely
something less than 30,000 but that the day
trippers would easily raise it to more than
40,000 on an average weekday.

18. See reports of Board of Health in Annual
Reports. For instance, in 1968, 195
sewage overflow problems and 28 drainage
of surface water problems were reported.
In 1967, there were 288 and 30@, respectively.

19. Information supplied by Hull Police Department
and confirmed by MDC Police, Nantasket
Division, and Messrs. Tierhey and Bray of
Hull Redevelopment Authori@y.
20. Giroux gives some data on comparable real F11
estate values. Additional information ob-
tained in personal interview with Walter
Hall Realty Company personnel.

21. Tax levies based on assessments for the years
indicated. Education costs, from Annual
Report (1968).

22. These estimates have deliberately been made
on the high side. If past@trends continued
the new housing would not have such a high
average value and the conversions would run
at about $3,000. As notedlearlier, the actual
trend in recent years has been one of decline,
,not growth, as the populati:on expanded.

23. The chief problem, of course, would be school
costs. Low-cost housing would continue to
attract young people with liarge. and growing.
families as in the past.

24. ee [email protected]':Veolopment. Authority brochure.,
Those Thirty Acres, and Giroux.

25. Information.from Messrs., Bray andTierney
of Hull Red@evelopment-,Authorit
y
26. See Hull Zoning By-,Law as revised by
Special Town Meeting of 20 October 1969.

27. Ibid.

28. See report of Permanent Sewer Commissio n
in Annual Report (196 8).

29. Transportation Facts.

30. Annual Report (1968).

31. Address from the floor by Thomas Cox at
Special Meeting, 20 October 1-969.

32. These are estimates

33. See Annex.

33. Data on income to town treasury from
Annual Report (1968).

34. Data on expenses from Annual Report (1968).

35. Annual Report (1968).

36. Interview with Mr. John Bray of Hull Redevelop-
ment Authority.

37. Information from MDC Police - Nantasket Division.

38. Interview with Mr. John Bray.

39. Costs based on costs of garage built at M.I.T.
in 1961, adjusted for inflation. Data supplied
by Mr. Robert Cavanaugh of M.I.T. Bu"ildings
Department.

APP END IXB

THE PILGRIM POWER PLANT

B.1 Introduction

The Boston Edison Company is presently constructing
a 655 megawatt nuclear power plant on 500 acres-of shore-
line property on Cape Cod Bay four miles south of.-Plymouth
Massachusetts. The site contains about 4000 feet-of'rocky
shoreline and will include two stone breakwaters 20GO and
900 feetlong, standing 16 feet above mean low water.

The study group thought th-at the investigation of the
wisdom of this location would enable us to demonstrate
the application of some of our cost-benefit techniques,
the feeling being that,there.might exist substantial.
external costs. associated both with the plant's thermal
effect on the marine ecology and with the effects of an
industrial installation on neighboring residential and
recreational properties.

B.2 Effects on the Marine Ecology

The plant's circulating water system has a flow rate
of 320,000 gallons/minute which removes 4.38 x 109 Btu/hr
of heat. The full power temperature rise is 28'F.- The
water velocity into the intake structure is 1.5 ft/sec,
while that at the discharge structure is 8 ft/sec.(l)
The intake water is taken from about 8 feet below mean
low rates (12 feet below msl) while the discharge is at
the surface at mean low water. The.prime reason for the
low level and low speed of the input is to avoid mixing
of the warmer surface waters into the coolant. However,
these characteristics also make it possible for all but
the slowest species to avoid being sucked into the cooling
system. The coolant water is carried in three ten-foot
pipes: two inlet and one discharge to the reactor struc-
ture. The maximum of the mean daily temperatures at the,
site through the 1967 and 1968 summer is 650F at the
surface and 570F at the seabed in 20 feet of water.

A physical model of the thermal pattern of the efflu-
ent was constructed at M.I..T. The horizontal scale was
1:250 and the vertical scale 1:40. The model was run
under several tide and current situations which in this
area runs essentially paral 'lel to the shoreline, flowing
SE on the incoming tide and NW on the outgoing. However,

B-1

these tidal components are very small, and thus the cur-
rent at any time depends primarily on the time history
of the wind. The heated plane was con fined to the upper
five feet of water. Table B.1 shows the surface areas
within the various isotherms as observed on the scale
model. These areas were observed to be essentially
independent of the tide and current situations. Since
the ambient temperatur,e is rarely above 650F in the
subject areas', it is only in a very small volume that.
temperatures above 80OF will be experienced.

These low temperatures are primarily a product of
the general coastal current which flows southward along
the entir'e northern New England.coast. This coastal:
current is an exte nsion of the Labrador Current."Its'-11
diversion to the east by Cape Cod results in a sharp
increase in the summer seashore temperatures on the:
south side of Cape Cod, making Cape Cod a formal barrier.
The current also sets up a counterclockwise mot@ion in'
the nearly circular bay.

The cooling effect of the coastal current is aggra-
vated in the summer by the prevailing southwesterly .
winds which pro'duce surface water flow out of the bay
which is compensated for by a subsurface flow of cooler
waters into the bay. As a result of this effect, Plymouth
is known among batherc, to be as cold a swimming area as
beaches @O miles north bf Boston.

On the other hand, the occasional northeaster will@:
reverse this effect and can raise the temperature of
the water in the bay by as much as 10'. Thus, it will
be during a late summer'northeaster that the temperature.@_
rise in the water in the discharge:will be most critidal@
to the marine inhabitants of this wate,r.

Economically the most important marine activity which
may be affected by the plant's thermalioutput is,21obstering.
In the 2400-acre area between the two ledges'which bracket
the plant site, some 10,000 lobster pots are fished at
the height of the season. The Massachusetts Division,of...,.
Marine Fisheries placed the total 1966 Plymouth lobster
landings at 550,000.lobsters.(2) Local sources estimate
that something less than half of these lobsters came-,from-
areas off the plant site. These lobsters would have a 'gross
landed value of some $300,00b.

It appears that the.plant will have almost no effect:
on the lobster population since what little temperature

B-2

effect there is is confined to the upper five feet of
water. However, lobster larvae are planktonic or free
swimming for the first two or three weeks of life, often
swimming on the surface during this period. It is pos-
sible that these larvae could be affected by the plant
either through the thermal effluent or by being sucked
into the system.

It is symptomatic of our present state of knowledge
of the sea that it is not known whether the population
of adult lobsters in the plant area grow up in the locale
or migrate into the region over the bottom as adults
from offshore populations, as many people believe. Even
if the lobsters do spawn in the area, they will certainly
not be affected by temperature rises of less than 5
(acclimated lobsters, both adult and young, can withstand
temperatures up to 85), and the surface area which has
a greater rise is less than 70/2240 = 3% of the local
lobster fishing area. Further, the fact that this intake
is 8 feet below mean low water and the larvae prefer the
surface implies that it is unlikely that they will be
swept into the coolant stream. This low intake will also
have advantages from the point of view of fouling for
species, such as barnacles, dwell in the very near surface
waters.

We conclude that with high probability the thermal
effect on the local lobster population will be insignifi-
cant.

There is only one other marine activity of economic
importance in the area (currents prevent silt deposition
for shellfish grounds and the density of lobster pots
makes fin fishing difficult) and that is the harvesting
of the alga, Irish Moss, whose collagen is used in the
papermaking and pharmaceutical industries. This plant
grows attached to rocks and stones from the low water
level to a depth of 25 feet. It requires, therefore, a
rocky bottom. The shoreline in front of the plant is the
center of a mile-long belt which contains the only pres-
ently harvested Irish Moss south of Maine. The annual
harvest of Irish Moss from the area amounts to about
750,000 pounds (dry weight) and supports one family and
about 15 college students during the summer. Its landed
value is certainly less than $50,000 annually. Its
marginal net value is undoubtedly less than half this
amount.

Little is known about the temperature sensitivity of
Irish Moss other than it does not grow south of Cape Cod

B-3

and, therefore, is undoubtedly more sensitive than the
lobster'. Once again@ if we can assume that-the rise-must
be at least-?.5a. for any noticeable effect, then 'the
affected are@L will be.a small percentage of theharvesting
area. Perhaps-of mor6 importance will be the disturbance
to the plant population during construction of the break-
waters. This may be balanced by the additional sites for
growth provided by the completed breakwaters. In any
event, the owner of the industry has gone on record at,
publichearings that he does not disapprove of the plant.

In summary, the effects of thermal e,ffluent on the
local@marine ecology'do no,t appear lare primarily because:

d) the 'waters into which the discharge takes place
@ar6 extremely cool even in the summer.

b) the t-hermal effects.are limited to a very sma 11
portion not only of the overall area of the body
of water., but even of,the local,f]-shing grounds.

TABLE B.1

Dimensions of and Area within the Predicted
Isotherms for Surface Temperature Rises above rM
Ambient Temperatures for the Pilgrim Station

.Temperature Predicted Comparable Area*
Rise above Length of Width of Area Surface Cooling Only
Ambient (OF)--,Area (ft) -Area (ft) (Acres). (Acres)

200 110- 1.1 248
100 1100 250 .6.3 725
50 ..34oo goo 70.3 1203
30 .5900 1300 176 - 155T
20 84o,o 2200@ 425. 1834

*This column is shown for p'urposes-of.comparison only, and
represents:the area within the des-ignatedlisotherms which
would be required if-the temperature redu ctio.n resulted
@u
only from s: r-face' c'ooling:.

B-4

B-3 solid-Wastes
Table B.2 summarizmthe solid wastes discharged by
the plant into the bay. 3
Sodium hypochlor@de is used as an antifouling agent
in the salt water cooling system. It will be used at,
levels which will result In a residual concentration of
free chlorine in the discharge waters of approximately
1 ppm. This is 5-10 times the lethal concentration for
most bacteria and is Close to the threshold for themajor-
@ity of plants and plankton under continuous exposure.
The last column of Table B.1 indicates that little surface
cooling occurs in the high tempprature waters, thus the
decreases in temperature can be regarded as indicating
the amount of dilution of the effluent. For example, a
temperature of 30 above ambient would-indicate a dilution
factor of approximately 280/30 or 9. Thus, one can argue
that toxic concentrations of chlorine will be confined
to an area of tens of acres.

However, the long7term effects of less than immedi-
ately toxic levels of chlorine in marine organisms is not
well known.- It is known that low levels of chlorinated
hydrocarbons have the ability to markedly decrease the
photosynthesizing capabilities of phytoplankton., Thus,
this effect bears watching.

In the effluent of estuaine power plants in the
Chesapeake significant greening of oysters has been ob-
served and this phenomenon has been traced to copper in
the condenser tubes released by corrosion and concentrated
by the shellfish. There has been no analysis of this prob-
lem for Pilgrim. It can be,expected to be less of a prob-
lem becaus e of the lack of oysters and clams in the dis-
charge area and the.greater dilution. Nonetheless, the
heavy metal concentration in the local lob.sters should be
monitored carefully.

The'annual release of radioactivity into Cape Cod Bay
is estimated to be between 7 and 50 curies.(4),This radio-
activity will be primarily in the form of isotopes of
cobalt3-manganese, iron, ahromium,@ and zinc. Assuming 50
curies/year, the radioactivity of.the circulating water
will be on the average -increased by 90 picocuries per
liter or about 2% of the maximum permissible concentration
in potable water, according to the AEC. At present, the
radioactivity of the coastal waters is about 300 picocuries
per liter.

B-5

TABLE B.2

SUMMARY OF ESTIMATED ANNUAL STATION EFFLUENTS

DISCHARGED TO CAPE COD BAY

Annual
Annual Radioactivity Chemical or
Type Volume Additions, Heat Additions
a THERMAL(')
Circulating Water 1.5 x 1011 gals Below' limits:.of 4 3-x, 1,09 Btu/hr(3)
10 CFR20(2)
Service Water 5.5 x 109 gals Below limits of. 7.8 x,107 Btu/hr(3)
10 CFR20(2)

B_ RADIOACTIVE

Clean Radwastes' Normally reused in station
Chemical Radwastes 4.0 x 1()6 gal 's 7-50 curi0s 8. 6' x 105 lb s of
aa so
14
C. NON-RADIOACTIVE
Make-up System. 2.9 x 106 gals None 66,ooo,lbs of
dissolved solids
and 2,12 0 0 lb. s
of particulates

(1). Normal 'operation at rated load.

(2) Ocean cooling water is naturally radioactive. The,
radioactive content of the station effluent will-be
increased slightly during the controlled.release of
liquids from the radioactive waste system. The liquid
effluent from the radioactive waste-system will be below ru
the limits specified in'10CFR20 after mixing@with the
cooling water.

(3) Addition of hypochl6rite to these systems is expected.
for about one hour each day resulting in residual.
chlorine,of-approximately 1 ppm in the effluent during
this period.

B-6

The extent to which this added radioactivity@will
build up in the bay depends on.the amount of interchange
between the bay's waters and those of.the,open ocean
This interchange is.a product of,three forces:
1) tidal currents;

2) the coun terclockwise rotation of waters in the
bay due to coastal extension of t.he.Labrador
current;

3) wind-induced currents.,

The volume mean depth of.Cape Cod Bay Is about 100
feet and the average tidal excursion 9.3 feet. Thus,
the fractional change in volume of the bay during one
tidal cycle is 9.3%.

Pritchard indicates that 70-80% of the water which
leaves a cojs@al hay on an ebbtidereturns, on the,next
flood tide. 5 We feel that,.due to the extremely wide.'
mouth of the hay and the fact that.tidal actions move a
unit. of water only about 6 miles per cycle at the mouth,
a higher proport.Jon of the ebb 'tide waters will return.@
Therefore, we feel that perhaps 90% of-the waters.that
leave the bay due to tidal action will return on the
next tide. This implies that 2 x .09 x .1 = .61,8, or,
something less than 2% of the'bay's volume will be. inter-
changed per day due to tidal action.

Of more importance is the counterclockwise flow
described earlier. Integration of the velocity is.opleths
of this current indicates a mean absolute flow of
.3 ft/sec. The area of the mouth of the bay is approxi-I
mately 1.6 x lo7 ft2. If we assume that the one-way
flow extends over 1/3 of the mouth th.en the volume of
water moved is about 1.11 x 1011 f0 per day, which is
about 9% of the volume of the bay..

Calculations of the interchange due to the winds.
-requires wind current data as a function of depth, which
is presently unavailable. However, surface, currents.,
generated by wind averages about 2% the wind speed and
It is well known that in the Cape Cod Bay area the.w.ind
currents are almost always considerably larger than tida
currents. Further, winds can persist from the same direc@ ,
tion for several days. A 15-knot wind for 48 hours 'will
move surfacewaters 15 miles considerably further thanthe,
tidal-excursions we expect at the mouth. Therefore, we-

B-7

expect the winds to be at least as important an inter-
change,mechanism on the tides.

In' summary, the net interchange of 10% per day
suggested by Pritchard do6s:.not seem unreasonable. This
implies that the mean residence time of any pollutant in
the bay is about 10 'days.

The.amount of water processed through the plant in
a 10-day-ppriod is about 6.2 x 108 ft3 which is about
1/2500 of the.volume of the bay. Thus, it does not
appear that general radioactive build-up will be a prob-
lem. However, the ability of shellfish to concentrate
radioactive metals is well known. Therefore, the con-
centration of radioactivity Kill have to be carefully
monitored in the-local lobster.

In summary, it does not now appear that this plant
will have any great effect on the neighboring marine-
ecology. However, certain important uncertainties remain.
.We note.with approval Boston Edison's funding of a $277,000
study of the ecological effects on the marine biology to
extend over the two years preceding the start-up'of the
plant and.the two year's following.

We sugg est that this study could usefully be, tied
into.the Marine Biology Laborat,ories' detailed.biological
survey of the entire Cape G od Bay conducted over the
.last two years under O.N.R. sponsorship. We also feel
that provisions for long-term monitoring-of the local
ecology should be made. Findlly, we should emphasize.
that our tentative conclusions about the biological effects
of this plant are not gene;rali'zable. By American stan-
dards, Cape Cod Bay is an unusually cold body of water
with quit,e.unique flushing characteristics. It is doubt-
ful if such a combination exists in more than a handful
of areas,long the United States coast.

B.4 The-Bene'fits and Costs Imposed on the Surrounding
Land Areas by the Plant

The other area where the plant can effect costs and
benefit@ nQ-t,acco un ted. for In the marketplac e results
from the introduction''of.,an industrial operation into-a-
light'-to-medium density.'residential area. -It was thought,
for example'3 that the plant bould'have substantial effect's
on surrounding summer property values.

'The property begins, j,ust south of'Rocky Point, a
50-foot-high outcropping,,'nbrth of,which the shore turns
sharply westward. As a result.5 there are no shoreline

B-8

The extent to which this added radioactivity will
build up in the bay depends on the amount of interchange
between the bay's waters and those of the open ocean
This interchange is a product of three forces:

1) tidal currents;

2) the counterclockwise rotation of waters in the
bay due to coastal extension of the Labrador
current;

3) wind-induced currents.

The volume mean depth of Cape Cod Bay is about 100
feet and the average tidal excursion 9.3 feet. Thus,
the fractional change in volume of the bay during one
tidal cycle is 9.3%.

Pritchard indicates that 70-80% of the water which
leaves a coastal bay on an ebbtide returns on the next
flood tide. (5) We feel that, due to the extremely wide
mouth of the bay and the fact that tidal actions move a
unit of water only about 6 miles per cycle at the mouth,
a higher proportion of the ebbtide waters will return.
Therefore, we feel that perhaps 90% of the waters that
leave the bay due to tidal action will return on the
next tide. This implies that 2 x .09 x .1 = .0l8, or
something less than 2% of the bay's volume will be inter-
changed per day due to tidal action.

Of more importance is the counterclockwise flow
described earlier. Integration of the velocity isopleths
of this current indicates a mean absolute flow of
.3 ft/sec. The area of the mouth of the bay is approxi-
mately 1.6 x l07 ft2. If we assume that the one-way
flow extends over 1/3 of the mouth then the volume of
water moved is about 1.4 x l0ll ft3 per day, which is
about 9% of the volume of the bay.

Calculations of the interchange due to the winds
requires wind current data as a function of depth, which
is presently unavailable. However, surface currents
generated by wind averages about 2% the wind speed and
it is well known that in the Cape Cod Bay area the wind
currents are almost always considerably larger than tidal
currents. Further, winds can persist from the same direc-
tion for several days. A 15-knot wind for 48 hours will
move surface waters 15 miles considerably further than the
tidal excursions we expect at the mouth. Therefore. we

B-7

expect the winds to be at least as im@ortant an inter-
changemechanism on the tides.

'In summary, the'net interchange of 10% per day
suggested by Pritchard does not seem unreasonable. This
implies' that the mean residence time bf any pollutant in
the bay is about 10 'days.
Fin
The-amount of water processed through the plant in
a 10-day period is about 6.2 x 108 ft3 which is about
1/2500 of the volume o,f the bay. Thus, it does not
appear that general radioactive build"up will be A prob-
lem. However, the ability of shellfish to concentrate
radioactive metals is well known. Therefore, the con-
centration of radioactivity w.ill have to be carefully
monitored in thelocal lobster.

In summary, it does not now appear that this plant
will have any great effect on the neighboring marine
ecology. However, certain important dncertainties remain.
We note with approval.Boston Edison's,funding of a $277,000
study of the ecological effects.on the marine biology to
.extend overthe two years preceding the start-up of the
plant and the two years,following.

We suggest that this study could usefully be tied
into the Marine Biology.Laboratories' detailed biological
survey of the entire Cape Cod Bay conducted over the
last two years under O.N.R.'sponsorship. We also feel
that provisions for long'-term monitoring of the local
ecology should be made.' Finally, we should emphasize
that our tentative conclusions about the biological effects
of this plant are not generalizable. By American stan-
dards,'Cape Cod Bay is an unusually cold body of water
with quite unique flu'shing characteristics. It is doubt-
ful if sucha combination exists in more than a handful
of areas .long the,Un'ited States coast.

B.4 The Benefits and Costs Imposed on the Surrounding
Land Areas bythe Plant

The other areawhere the@plant can effe.ct costs and
benefits no 't account.ed for in the marketplace results
from the introduction.-of,.an Industrial operation into a-
light-to-medium. density residential area. It.was thought,
for example'. that the plant could have substantial effects
on surrounding summer pro.perty yalues.@

uth of Rocky Point, a
The property begin 'sjust so
50-foot-high outcropping, north of which the shore turns
sharply westward. As- a result', there are no shoreline

B-8

residences to the north of the plant from which the plant
can be seen. To the south of the plant, there is another
shoulder placing the plant in a hollow. Further south of
the plant the shore turns slightly westward.. As a result
the plant-can be seen, only from several hundred yards of
non-plan.t shoreline p@roperty. Interviews with seven of
the twenty-two. homeowners in the area indicated that, in
their opinion, the plant had had no effect on property
values and that, in their view, the effects 'of the in-
creased local payroll (during construction'the'plant em-
ploys 400 people and it will have a permanent payroll of
50.people) more than balanced any detrimental effects.
Only one person, the owner of a cranberry bog surrounded
by plant property, has expressQd opposition to the plant,
but she was.unable to marshal any support from other local
interests. wHowever, since the survey was taken in October.,
no summer residents were included, who.presumably would
place less value on parochial benefits.

.The land behind the plant rises to 300 fet within
a mile of the shore, placing the entire plant below the
skyline and thus decreasing th e visual impact to any off-
shore observer.

Tinally,,an interesting example of internalization
has occurred in this problem. The ownerof the property
abutting the plant to the south and thus most affected by
it was the owner of the property upon which the plant is
presently building. Thuc, in buying the property, the
power company had,to compensate this individual for the
cos*ts they would impose on him as a neighbor.

In short, it appears that the perceived external
costs of the plant are small and more than compensated,
in the neighbor's view, by the plant's effects on the
local economy.

We must emphasize that, from the region's point of
view, this latter is a wash. The same effects would be
observed wherever the plant was located. The only excep-
tion to this statement is if there are differentials in
,unemployment in the region. If there are differentials
in unemployme nt,-the opportunity cost of labor to
the economy will be lower in the high unemployment
area than in the low unemployment areas. Since a pri-
.vate utility company operates on market wage rates
rather than marginal socialcosts of labor, this can
result in inefficient plant locat Iion in the face of
variations in unemployment. However, these differentials

B-9

are unlikely to be large in even a moderately free labor
market with a,moderate amount of worker mobility. With
respect to.the case at hand, Plymouth @vas suffering'a
higher than regional unemployment rate due-to .. thel@c'losing
of the local cordage..industry. On the other hand., it
would be.interesting to know how many ex-ropemakers are
working on the plant. In summary, the parochial benefits
to the economy*of the neighborhood of the plant's location
should rarely be an important consideration in plant loca-
tion., since similar effects will be experienced wherever
the plant is located.

Similarly, with respect to th e external disbenefits
of the plant, given that a plant will be built, it is the
differentials in these'disbenefits- with location that are
important. Since an important consideration,in the value
of.shoreline land is its scenic beauty, we expect there
would be cases where substantial differences in these'
disbenefits between shoreline and non-shoreline locations
might occur. This differential would have to be balanced
against the added costs of the inland location which in-
clude not only additional' pipe and pumping co-sts, but-also
additional transporting of equipment costs since present-
day power.generation equipment is so large that it must
be transported by water. These costs will almost always
dictate a shoreline location. As we have seen 3 sho reline
locations doexist where the external cost of a plant can
be kept small. But this example also indicates that almo'st
anywhere a plant is suggested it will meet with local
approval on grounds which, from the region's point of view,
are a wash. Thus, local force's cannot be expected to I I U
generate opposition' in proportion to the eiternal disbene-
fits-of the particular location.

It is of more than passing interest that., while the
plant occupies some ten acres of property, Boston Edison
purchased over 500 acres. This is, in part, a response to
AEC regulations and, in part,p-rovisibn for future additions.
However, it suggests that public recreational-use of most
of this land could be complementary to the-power generation
proper. Florida Power and Light's installation at Turkey
Point is an example. Boston Edison seems at least vaguely
aware of,this possibility and is providing for public access
to the breakwaters, including a footbridge from one break-
water to the other. However, t 'he possibility of' more
intensive recreational use of the upland property should
be investigated. It is symptomatic-of@th,e-politic@al'organi-
zation of the public's interest in the shoreline that the

B-10

Massachusetts Department of Natural Resource@@j Which
licenses the plant to eject wastes into the bay, has shown-
no interest in the public development for recreation of the
land upon which the plant stands, despite the fact that,
this department contains the Forest and Parks Division
which is charged with'planning for outdoor recreation for
the state.

B-11

APPENDIX C

STRATEGIES FOR HANDLING THE DEMAND FOR OIL IN NEW ENGLAND

C.1 Introduction

The purpose of this study is to assay possible
development plans for oil processing and distribution
in New England and the demands that these functions
will place on the coastal zone. This study considers
first the possibilities for a refinery in New England
and then examines various distribution schemes with
and without a refinery. It concludes:

a) A refinery in New England would result in very
substantial savings in fuel costs to the region. if
the entire savings were passed on to the consumer, the
savings would have a present value of about five hundred
million 1966 dollars at an inflation-free interest rate
of five percent over the next forty years. That means,
the savings would be an equivalent to the increase in
wealth which would result if each person in New England
were given about $450.

b) The savings measure the amount that the region
must be willing to pay in order to avoid such external
costs of a refinery as the industrialization of a wilder-
ness area, and air and water pollution. If the region
values the external disbenefits at more than this figure
for all possible locations of the refinery, then a New
England refinery should not be built. If it values it
at less than this figure, for at least some locations,
then the net present value for these locations will be
positive and the refinery should be built at that loca-
tion which maximizes this net present value.

c) Clearly, the existence and location of this,
refinery is a very serious question and one in which
non-market costs and berefits should play an important
role if extremely serious misallocations are to be
avoided. It does not appear that, at present, these
effects are being properly weighed. Secondary or wash
benefits appear to be geing given undue weight.

d) Given that a refinery is built, the most effici-
ent distribution scheme, neglecting possible differen-
tials in the frequency of oil spills, involves direct
shipment via barges from the refinery to local distribu-
tion centers. If no refinery is built, the most

C-1

efficient distribution scheme involves shipment via
large product tankers to two transshipment terminals
using monomoors - one in Boston's outer harbor and one
in the Portland area. From these terminals oil would
be transported via pipeline to Boston and Portland and
via barges to outlying ports. Such a scheme is not only
more efficient in terms of market costs than the present
highly distributed net of terminals, but it probably
has advantages with respect to oil pollution as well.

C.2 The Outlook for a Refinery

The primary sources of supply of crude oil to the
Eastern U.S. are Venezuela, Libya and Nigeria. This
crude oil currently arrives in foreign tankers of an
average size of 100,000 deadweight tons and is fed
primarily to the Delaware River refinery complex. Should
refinery capacity be added to the New England area, there
would be negligible change in crude oil transportation
costs as the distance is approximately the same. The
advent of petroleum reserves reaching the East Coast via
the Northwest Passage though may change the picture. The
additional 500 miles that specialized icebreaking tankers
would travel to reach Delaware rather than to a New
England refinery amounts to an additional cost of $0.24
per ton of crude oil. This cost is attributable to fuel,
wages and capital costs. The specialized tankers capable
of traversing the Arctic Ocean will be much less effici-
ent than normal tankers in the open ocean. Use of an
icebreaking tanker in open water incurs a high penalty
because of its higher initial cost. A New England
terminal offers a considerable incentive in view of the
fact that oil companies anticipate in excess of 15,000
tons per day of Alaskan crude oil to be utilized on
the East Coast.*

The size of the modern crude oil tankers is another
reason for interest in the New England area. Future
crude oil tankers will have displacements in excess of
250,000 tons. These ships draw 60 to 70 feet. There are
no presently developed harbors on the U.S. East Coast

*There is also the possibility that oil will be found in
commercial quantities off the New England coast; however,
we do not consider this eventuality explicitly in this
report.

C-2

capab le of handling these large ships.

The coast of Maine is one of the few places. where
drafts of 70 Peet can be accommodated in sheltered areas.
For example, Machias..Bay could accommodate ships with a
draft up to' 100 feet in sheltered waters within one-
quarter mile of the shore. Deep harbors such as these
can be found in no other area on the East Coast.

Single point monomoor facilities can off-load petro-
leum at a rate of $0.08 per ton. The proximity of a
Maine refinery to the off-load site means that crude oil
could reach the refinery buffer storage tanks for a cost
of not more than $0.10 per ton. The cost for supply of
the same ton of crude oil to a Delaware River refinery
is approximately $o.64 per ton since the refineries are
about fifty miles from water deep enough to accommodate
the tankers.

Table C.1 shows savings in initial crude oil delivery
costs for foreign and Alaskan crude oil when new refinery
capacity Is located in New England rather than in the
Delaware refinery complex.

TABLE C. 1

Differential Costs for Oil Shipment.
to Delaware River Area and Machiasport

Transportation Offloading Differential
Refinery:Site Differential Cost. cost
Foreign Alaskan Foreign Alaskan Foreign Alaskan

Delaware RiVer 0 $-24 $.64 $.64 1$.64 $.88

Machiasport 0 @O .10 .10 .10 .10

Savings ------- $.54 $.78

This shows that acrude oil transportation cost saving
of .$0.'54 cebts'per ton of,foreign crude oil and $0.78
per ton of Alaskan crudeoil is realizable for new East
Coast refinery capacity located in Maine rather than in
Delaware. These savings are before product distribution
and must be combined with differentials in the cost of

C-3

distribution of the refined product.be'fore total differ-,.,
entials in transportation costs can be determined.

The average'refinery unitp-rocesses about 100,,000.
barrels of crude oil *per day. This-is ccm1i.valent.,to
approximately 5 mill'ion tons of product -@,.oor year.. As
shown in Table C.2, New England demand can be expressed
in terms of-required refinery units..

TABLE C.2

Projected.Refinery Units Needed

Year 1966 1980- 2ooo

Product Demand
tons/year 26,000,000
34,000"000 5 0 , Ooo , 0@0 0.

Refinery Units
Needed to Meet
Demand 5.2. @6. 8. 10-

It is assumed that existing refinery capacity in the
Delaware River area is capable of supplying approximately
six of the "refinery unit,11 or about 30 M tons/year. By
1972, refinery operations at Machiasport-could become a
reality. This initial refinery could.be expected to
supply all northern New England regional product demands
.except Boston., Portsmouth and Sa.lem.. Therefore, the new
crude oil supplies could justify even,more cap4city.in
u
New England. . Table C 'Presents the value of saving-s-
resulting from consumer proximity to the refinery; i.e.,
a short run for.an intracoastal tanker is shown.. Future..
refineries might also be located in the New England area
as the need for.refineries to supply New York, New.Jer;sey
and Connecticut increases. This growth rate is not
currently available. The possible@sav-ings -in distribution
costs are given in Table C-3, assuming that only enough
capacity to serve New England north of Cape Cod is con-
structed. The product tanker rates for distributing
petroleum products are computed1from typi.cal cost-s for.
short tanker runs given by the Maritime Administration.*.
In'the next section, a more detailed analysis of alterna-_
tive distribution schemes is given.

C-4

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In short, it appears that foreign oil can be refined
and distributed in New England for about one dollar per
ton less than it would cost to do the refining in the
belaware River complex. If Alaskan oil is used., this
ifferential rises to $1.'25/per year. Further, tho
Delaware River refineries are presently operating near
ccipacity, thits'additional'capability will have to be
built.

We therefore expect the oil companies to attempt to
meet future New England demands with New England refineries
whether or n'ot Alaskanloil is available and whether or not
a,free.trade zone is established. We expect, therefore,
the oil companies to be desirous of constructing a mini-
mum of two 100,000 barrel/day refinery units by 1980 in
New England and a maximum of 8, if present Delaware
capacity is transferred to serving other locations. By
the year 2000, we expect them to have plans for a mini-
mum of five and a maximum of 11. The most recent proposal,
that of Atlantic World Ports, called for prompt construc-
tion of a 300,000 barrel per day unit. Under our assump-
tion., the projected net present value of the savings,
namIely, the one dollar per ton over the next 40 years,
which would result with New England refining in 1966
dollars at 5% is $54o,000,000 and at 8% $430.1000,000.
That is, each man, woman and child in New Engla 'nd would
have to put aside about $450 now to make up*the differen-
tial in heating costs over the next 40 years..

C-3 Nonmarket Considerations

Existence of such large savings does not necessarily
imply that a refinery should be built in New England,. If
the region is willing to pay this amount to avoid the
external disbenefits of a refinery located anywhere in
New England, then it should not be built. Further, there
is some evidence that the region does place a high value
on the detrimental aspects of a refinery. Attempts to
build a refinery in the Narragansett Bay area in the
middle fifties were frustrated by local opposition to
such an installation. On the other hand, if nonmarket
considerations are going to rule against a refinery, then
the last section implies they must be very large@indeed,
and thus deserve considerable study. It is not clear
that such study is taking place.

Given that a refinery is to be built somewhere, then
one must weigh locatio"nal differentials in these non-
market effects'in deciding where to.place the refinery.

C-6

In this respect, the two leading contenders for the
location of, at least, the first New England refinery
complex present an interesting and important problem in
nonmarket effects.

The most commonly suggested location is Machias Bay.
Machias Bay is the easternmost embayment in the mainland
U.S.A. located some 40 miles from the Canadian border
and 210 miles northeast of Boston. Machias Bay has over
100 Peet of sheltered water less than a one-quarter mile
from shore with immediate access to open water. The
area is almost completely.undeveloped. The peninsula
upon which the proposed refinery would stand, Foint of
Main, contains only four houses. Three organizations
have expressed interest in Machias Bay. The.original
proposal emanated from Occidental Petroleum. However, it
was tied to the establishment of a free trade zone and a
change in the import quotas. Atlantic-Richfibld has
bought options to lease several thousand acres and has
not tied their offer to a change in the oil import laws.
Recently, Atlantic World Ports has applied for oil import
quotas and announced plans to build a refinery in,
Machiasport.

Another location which is receiving increasing.a tten-
tion is Casco Bay, specifically Long Islan(3, three miles
off Portland. Long-Island contains about 400 acres and
can accommodate drafts to 70 feet. Long Island already''
contains a 600,000 bbl underground@oil storage facility
on a 181-acre trace formerly owned by the Navy. King
Resources, an oil importing concern, recently bought the
site and has announced plans to build an eight billion bbl
storage facility. A storage facility of this size without
a refinery is pointless. Therefore, we can be sure that
King.Resources has a refinery in mind. King's plans have
generated consIiderable'opposition among the island's
300 year-round residents 'and local citizen's groups have
brought, suit against the City Council, who in June, 1969,
rezoned the area from residential to industrial. At
present, the matter is unresolved and King has indicated
it will not proceed with any construction until the issue
is decided.

The choice between these two locations* should be

*We do'not intend to imply that these are the only two
possible alternatives.- Maine is uniquely blessed with
sheltered deep water.@. Other possibilities include Muscongus
Sound and Penobscot Bay.

C-7

based on economics in the wide sense. That is., is it
more consistent with the region's values .. to locatea
refinery in a remote, almost wilderness, area in which
very few people presently live, even though this choice
would result in a critical modification of an -entire
scenic area, or to lo@ate the plant on a residential
island abutting an area which is presently rather highly,
industrialized (Portland already handles 20 millions
of ton's of oil per year), even though this would I result
in severe dislocation of the present residents and the
further scenic deterioration of an area, which while no
longer as beautiful as Machiasport serves many more
visitors than Machias Bay?

We suggest that this locational problem deserves the
most thorough kind of cost-benefit analysis for we can be
sure of at least two things:

1) The location of this refinery will have an
irreversible impact on the future development of the Maine
coast; and

2) The unaided private market cannot be expected
to pick that location which is most consistent with the
.values of the citizens of Maine and of the entire New
England region not only because of the externalities
involved, but because in a project of this size the
developer can use parochial benefits to coerce not only
a local community but an entire state. Further, competi-
tive forces aren't really operative in this situation.
Whoever builds the first refinery will have a monopoly
over the region which it can expect to enjoy for many
years..

The profits that the refineries can extract in this
situation are simply transfer payments from the consumer
to the refiner. Based upon these profits, the developer
V-111 find it easy to buy off all but the most determined,
organized opposition to the location he chooses in his
private interest, whatever the merits of that location.
Most of the present proposals involve 15% of gross profits
to the state of Maine and 1 -0% of gross profits to the
other New,@@.gland states. It will take a tough-minded
legislator indeed to say that taxing oil users in this
manner is not preferable to forcing the refiner to lower
his prices instead. rR

There is no alternative to competent investigation
by a public agency of the costs and benefits of all the

C-8

various locations from a regionwide point of vie w and to,
tight public control of the resulting monopoly. We see
no evidence that such investigation is taking place. In
fact, we feel that the-Maine agencies involved are . .
placing too much emphasis on parochial benefits., which
will occur wherever tLe refinery is iocated and thus are
not a function of location. Further, it app ears that the
State of Maine is not driving as hard a bargain.with
potential builders as it might, in part because of over-
counting of parochial benefits and in part beca,u,se,of
the relative eas-e with which public funds can be raised
through the.refinery's monopoly pov@ers-

in short, if there was ever a situation where detailed
cost-benefit analysis should be applied to a coastal zone
development, the problem of discovering that location,
if any, for a New England refinery,which is most consist-
ent with the values of all of New England, is such a
situation. Needless to say, in the time frame of the
present study any attempt at such analysis would, have been
irresponsible.

C.4 Distribution Policies for New England,Oil

C.4.1 Introduction

Thissection surveys some of the economic's of.the
distribution of the refined petroleum products'to Ne'w
England. It seems clear that the bulk-of thi's distribu-
tion will continue to be.by water. The following three
questions then arise:

1) Should the product tankers service directly the
six or seven ports which presently receive signifi.cant-
quantities of oil?

2) Should the product tankers ship only t"o am' aor"
transshipment terminal whereupon distribution takes
place by barge?.

3) If a refinery is built in New England., should".'
product tankers be used.at all?

Taborga has shown that the trade-off between
the economies,of scale associated. with a smallInumber of
very large transshipment terminals and the added.distance
and transshipment costs associated with intermediate
terminals implies that the typical regional development.
distributional pattern will be:

C-9

4), A phase in which there is a large and growing
number of small terminals, each demand center being
served''by an associated terminal.

b) A more deve Ioped,phase inwhich th e :.,economies
of scale associated,with transshipment begin to operate
and Indicate initial consolidation of sets of the
individual terminals into large transshipment terminals
which serve subregions.

C) A mature phase in.which, if the economies of,
scale warrant, this consolidation process continues
until the entire region is-served by a single transship-
ment.terminal. This process appears to be well advanced
in the Western Europe-Bantry Bay, Ireland situation.

In this context, the question then becomes one of
determining the degree to which New England has progressed
through this sequence.

"C.4.2' Assumptions

For the purposes of this study, demand,is referred
to as total tons of oil products without making any
effort atdisaggregation. The reasons behind this assump-
tion are:

a) Determination of marine terminal charac'teris-
ties and size is dependent on total throughput3

b) Demand by product for the New England area is
not readily available.,

rM
c) The differences in specific gravit 'y of differ-
ent products can be disregarded in a general survey of
the type being attempted here,, given the preponderance
of. fuel oils.

The rate of increase of oil-products demand will be
assumed to be approximately 2 per cent per year . This
assumption is based on a study made by Arthur D. Little,
Inc., in 19-64'65.* The relatively small-growth rate
reflects the increasing share projected for nuclear plants
in the power-generation of the region.

Using'1967 as'a'base year the following table gives
the relative and absolute values of demand.

*t1projective Economic Studies of New England."

C-10

TABLE 'C. 4

Petroleum Demand by State

Demand (1967)
(tons) Per Cent

New Hampshire 2.,414,ooo 8.0

Maine 4,050,000 13.4

Massachusetts 22,120,000 73.3-1.

Vermont 1,510 00 5 .3
Total 30,094,000 100.0
The d'emographic*patterns 'of the four states consid-
ered have been assumed stable; in other words, relative
growth will not exist among them. This assumption is
equivalent tosaying that the spatial distribution of
demand will not suffer significant variations in the time
pan considered by the study and.that all net increases
of demand will always be "allocated" in the same propor-
s

tion to each state.

The mai-n ports to be considered as potential lo.ca-
tions for oil terminals are M'achiasport, Penobscot River,
Searsport and'Portland in Maine, Portsmouth in Npw,
Hampshire, and Boston and Salem in Massachusetts.

Table C-5 shows marine distances between all locations
considered.
TABLE'C-5

Distances between New England Ports
(Nautical Miles)

Pen. Sears- Port- P'ts- Machias-
River port land mouth Salem Boston port

Penobscot River 13.3 lo4.o 137.5 164.o 178.3 127.2

Searsport 13-3. 90.6 124.3 151.0 i65.0 114.o

Portland lo4.-o go.6, 5o.8 83.5 97.8 146.o

Portsmouth 137.5 124.3 50.8 -46.7 61.2 177.3

Salem [email protected] 83.5 46.7, 21.4 195.6

Boston 178.3 1615.0 97.8 61.2 -- 207.8

Machiasport 127.2 114.0 146.8 177.3 195.6 207.8 -

C-11

With respect to term .inal'technblogy, only monomooring
systems will be considered. Earlier studies have shown
monomooring to be the most cost-effective mooring system
Fla
in the New England context.

The costs assumed as typical for all terminals are'
shown in Table C.6.

TABLE Q-6

ra
Construction and Operating,Costs of Terminals

Number Underwat'e'r
of Berths Monomoor Cost. Pipeline Cost

$1,8op,ooo $1,500,00:0

2 $1,8o,o,ooo x 2 $ 7QO,000
3 $1,800,000 x 3 $ 700 , 00'0
4 $1,8oo,ooo x 4 $ 900000

Tank F arm on Shoreline $18.OG/Ton of Storage

Operating Costs:@

Number Tank Farm Crew Line Running Launches
of Berths '.Cost/Year (Deprec + Operating)/Year

1 $1503000 $150,000

2 $210,000 $150,000

3 $260.1)000 $150,000

4 $290,000 $300,000

The summary of unit costs above assumes similar
conditions in all locations to'be studied. This assump'
tion should be modified to reflect an individual analysis
of each situation if the@type of methodology presented
here were actually to be applied.

We have based our analysis on use of 69,800, deadweight
ton product tankers throughout the life of the system.
A more detailed analysis would entail predicting the
growth in ship size through the life of the system or,

C-12

better yet, employing expected.value analysis as de's c.r-ibed':
in Chapter III and postulating a distribution of product
tanker sizes throughout the life of the.system.

Distribution can be attempted by means of either:
pipelines or some for*m.of maritime transportation.. A pipe-,
line in general has the disadvantage of little flexibi"
lity, since it cannot respond to the changes in optimal
distribution strategies which occur with the.growth and.,.
consolidation of a regional economy. Furthermore, the
New England coast is concave. This implies that sea'dis_"
tances are shorter,than land distances. But maritime
transportation is generally competitive with pipelines
over the same distances.-,.,The,possibility pf,submarine
pipelines does not seem an advisable alternative either,
since the savings in distances are more than offset by
the higher cost for materials and construction of the
pipeline and by the operational complications associated
with floating pumping stations along the pipeline.
With these facts in mind, our emphasis has been
placed on marine transportation. The questi6n then be-
comes one of deciding whether to ship from the refineries
with product tankers directly to the shoreside distribu-
tion points or to transfer from the product tankers at a
limited-number of major terminals I using.barges:.to supply
the shoreside distribution-points.not served by.tbe majpr.,,-.,.
terminals. The costs of transshipment mustb,e.balance_d-_,.,_
against the higher utilization of capital affordedby
the barge system.

The barge costs cited are based on seagoi ng barges.
@hich are pushed rather than pulled by the,towboat,. Push-
ing has the advantage that the towboat-bargecombination
operates as one hull with consequent savings in power due
to lowered wave resistance. It also is a more.man.euver-
able and basically less hazardous system than towing.
However,.it should be noted that.1the puphi,ng of barges in
open sea conditions is barely the state@ of the art..
However, the"technological problems remaining appear far
from insuperable.*

*The problem of the coupling of towboats and barges in high
seas conditions has not been properly researched.yet,
mainly on account of lack of visible need for it It is
hoped that this study will make apparent',th.e-current
importance of such research.

C-13

Figures C.l. through C.3 show operational and cost
char'ac'@eristi.cs of a pushed barge system.

Specific Cases

We have chosei@ to study three alternativemajor
New England-oil distribution systems:

I. A Distributed System. This system employs
direct shipment via product tankers from the refinery to
terminals at

Penobscot Riv'er

-Sear.sport Maine

Portland

Portsmouth New Hampshire

Boston
Massachusetts
Salem

II. System Employing Primary Consolidati6n. Here
product tankers service Portland and Bb-ston only and
further distribution is by barge@

III. Complete Consolidation. Here all transship-
ment is handled from a single major terminal.

Two possibilities are considered under alternative III.

.d) Tankers arrive at Boston only. This alternative
corresponds to a minimum distribution cost con- ro
figuration as can be seen by multiplying entries
in the mat rix of distances (Table D-5) times
thedemand at the destination And adding over
each@row. Boston-has the least ton'miles to be
distributed with this arrangement.',

b) The main terminal is in Machiasport, Maine.

As we shall see, analysis of this last alternative
y
allows us to make the statement that., if a refinery is F11
built in New England all distribution should1take place
3
in barges directly from the refinery@

C-14

In all cases, inland distribution is treated a's a
parameter not having any impact on the comparison of
alternatives being attempted'.

The areas of influence,for:each port are as follows
(as shown by 1967 daea):

Portsmouth: Handles 66%. of,,demand.,in New Hamp,shire.

Portland: Handles 100% of demand in Vermont, 34% of
demand in New Hampshire and 57% of.demand'in Maine.

Penobscot River: Handles 30.5% of demand in Maine

Searsport: Handles 12.5% of demand in Maine.

Salem: Handles 5% of demand in Massachusetts.

Boston: Handles 95% of demand in Massachusetts.

c.4.4' Summary of Evaluation Re.sults

A comparison:of alternatives is,.m.ad,e on the basis
of minimum'present Value costs to serve the demand shown
in Table C.4 with this demand escalated,at 2%. per year.

Each alternative has four main items, berths and
storage at the terminals, and barges and towboats., if
transshipment is required-(as in.b and c). The present
value calculations have been made for interest rates of
5% and 8%. 1970 U.S. dollars have beenused throughout.
Ten knots average speed has been used for barges and
towboats.

Case I. Distribute,d System

TABLE C.7'

Throughput at Each Terminal (millions of tons)

Ports 1970 1985 2000

Penobscot River 1.31 1.7 2.37

Searsport 0.53 0.71 .0-95

Portland @4.91 6.61 8.89

Portsmouth 1.69 2.28 3.06

Salem 1'.17 1;58 2.13

Boston 22.23 30-20 4o..62

C-15

TABLE C.8

Arrival Rates (Ships/month at':Each Terminal),

Year-

Port 1970 1985 1990

Penobscot River 1.37 1.84 2.48

Searsport 0.55 0.74 0.99

Portland 5.11 6.88. 9.,25

Portsmouth 1.76 3@1,81

Salem 1.22 1.64 2.21,

Boston 23.20 31.20. 42.00,.

'C.4.5 Summary of Costs of,Distributed System (_Case.I)

In the distributed system no transshipment.is
required and we must concern ourselves withterminals,
only. Table C.7 gives the annual operating c-ost.,s.and
the present value costs for the terminals to service a
distributed system in New'England.

TABLE C.9
Yearly Costs and Total Present Value Cost for Terminals

Yearly Cost Total Present Value Cost

Terminal 1970 1985 2000 Int. Rate.5% Int. Rate 8%

Thousands of Dollars Dollars
A* 935 935 950 15.32xlO. 6 11.,4xlO6
Boston 2,627 3,122 3.,425 48.40X106 36.46xio 6
Portland 1,529 1,529 1,800 27-03X106 18,..76xio6

Total present value costs-for
4 Case A terminals, Boston 6 6
and Portland 134.'Tlxlo 100.82xlO

*Terminal A stands for any of the following terminals:
Penobscot River, Sear'sport, Portsmouth,,Salem.

C- 16

Primar@ Consolidation (Case II)

In Case II the tank er,terminals are built,only at
Boston and Portland. Boston serves Massachusetts and
Portland the rest of the region. Existing-tanker berths
4
and tank. farms would be used as barge berths.

TABLE-C.10

Arrival Rates Ships/Month at,Each Terminal

Year

Port 1970 1985 2000

-Portland .8-79 .1 1'. &3 -15 - 9!0'.'

Boston 32.84 44.21

TABLE C.11

Costs for Primary Consolidation System

Annual Cost Total Present Value Cost
(Millions of Dollars) (Dollars)
1970 19815. 2000. Int. Rate 5% Int. Rate 8%
6 6"
Fleet 2.364 2.952 3.638 46.75xlO 35.2'OxiO'

Boston
Terminal 2.627 3.122 3.425 @48-75xlO 6 36@46xlo6

Portland
Terminal 1-5.29 1.529 1.8ob 25-03x106 18. 76cl.o6--

and the total present value costs
6
are: 120'.53xl 06 go. .4 2j,,10

Final Consolidation (Case III)

For both Cases'I and II the same-t6tal rat:e;of'. arrivals
applies. As in Case'II existing t ank farims and t anker.
berths are used as barge'berths at an opportunity co-st-of
zero.

C- 17

TABLE C.12

Arrival.Rates Ships/Month

Year

1970. 1985 1990

Boston or Machias 33.21 44.67 60.11

TABLE C-13

Case III Annual-and Present Value Costs

Annual Cost Total Present Value Cost,
(Millions of Dollars) (Dollars)
1985 2000 I.nt. Rate 5% Int. Rate 8%
Fleet cl) 3.846 4.055 4.587 6'4..50xlO6 49.6ox,06
Fleet c2) 6.990 7.420 7.980. 114.30xlo6 .86.4-2xlO6
Terminal 2.720 3.2117 3.683 49.90xlO6 381.78xio6

TABLE C-14

Total Present Value- Costs for Terminals at Boston and Machias

Case IIIa) 5% Interest 8% Interes@t
6 88 6
(Boston) .114.4oxio .38xio..

Total Yearly Costin 1970 $6,566,000

Case III b) 5% Interest 8% Int*erest,
(Machias) 164.20x10'6 11 125-.'20x110

Given the remoteness of Machiasport with respect to
the principal comsumption center5, :..:-the' c'dst@ of uaing it
as a transshipment center ts.prohibitive. b.ecause of distri
.bution costz alone,.,,.This situation-'is- Iremoved if IIIb)
corresponds to the distribution problem,associated to a
refinery center in Machiasp or It.I In. such.a case, costs of
storage and tanker berths at the terminal are part of
the F.O.B. price of the oil products at the refinery center.

c- 18.

Thus, we are avoiding a transshipment by placing a
processing plant at the transshipment point and, there-
fore, (and only if we do so) the cost of the terminal
should not be added to obtain the total of IIIb). The
only cost in this case would be the fleet costs associated
to the distribution operations. This alternative we
have labeled IIIbR.

TABLE C 15'

Case IIIbR. Present:Value Costs

CaseIIIbR 5% Interest 8% Interest
(With refinery center 114 .30xlO6 86.4,2xlO6

TABLEOi6

Cost Summary

Total Annual Cost in 1970, Total'Present.Value Cost
(millions of doll'arsj 5% 8%
1 06 6
7.896 134.88xi 101.02xlO
11 6.520 120.18xiO6 90.02xlO6
IIIa) 6.566 114.4oxio 6 88-38x,06
IIIb) 9.710 164.20x106 125.20x,06
IIIbR 6.990 114-30X106 86.42x106

In summary, New England is approximately at the stage
at' which finalconsolidation of its oil distribution
system should take place. 'if refined products continue
to be shipped into the region from Delaware Bay, then the
.region should be seriously considering the construction
of one or two transshipment terminals with subsequent
distribution,by barge. The cost difference we have
indicated between one regionwide terminal in Boston and
a pair of terminals in Boston and Portland is not large
and the decision between these two alternatives should
undoubtedly depend on factors we haveleft out of the
analysis, such as externalities impliedby transshipment
terminals, differentials in frequency of oil spills, etc.

C-19

It a refinery is built in New,,England, even at a
location as remote from the demand centers as Machiasport,
the fact that alternative IIIbR is cheaper.t- 'han alter-
natives II and IIIa indicates that no.transshipment
should take place anddistribution should be via barge
direct from the refinery.

Notice that IIIbR is not the predicted present value
distribution costs associated with a refinery at Machias-
port, but the costs of moving the.oil from the Delaware
River through Machiasport, deleting transshipment costs.
II and 1114 are, also based on oil originating in Delaware.,
Hence, the comparison is consistent. If the oil was
actually processed in Machiaspert, the costs of both
systems would be reduced by the product tanker costs from
Delaware to New,England and the costs of II and IIIa
increased by the product tanker costs from Machiasport
to the shoreside or transshipment terminal, respectively.
Hence, we can be sure that direct shipment from a refinery
at Machiasport is indicated. Since Machiasport is the
New England refinery location most remote from the demand
centers, this conclusion will hold a fortiori for any
other possible location. In short, if a refinery is built,
it would snrVP as the final consolidation terminal.

C-20

GPO 900-718

3 6668 00002 7724