Economic incentives for institutional change: the case of the Virginia Wetlands Act

The case of the Virginia Wetlands Act of 1972 is presented as a problem setting within which to explore the view that some institutions provide economic services, and that pressure for institutional change result from changes in demand for these services.

A general hypothesis to be tested in the case of the Virginia Wetlands Act is that institutional change to assure protection of ecologically productive wetlands was associated with increases in demand for those goods, services, and activities dependent in some way on the ecological services of wetlands. More specifically, it is hypothesized that net social benefits from preservation of wetlands have been increasing more rapidly than net social benefits from development uses of wetlands which destroy marsh vegetation.

This research used a case study approach to examine the influence on residential land prices of waterfront situation of residential sites achieved by filling or draining salt-marshland. The market value of land, as used in this study, is defined within the context of an economic theory of rent. A land value comparison technique based upon multiple regression analysis was used to identify market price differentials attributable to waterfront amenities of marshlands as residential sites. Changes in this differential over time are taken as a measure of the time rate of increase in social benefits attributed to development uses of marshes.

For purposes of comparison, estimates were made of the time rate of increase in social benefits attributable to preservation of wetlands. The ecological productivity of wetlands is essential to maintenance of marine species in the Chesapeake Bay. A major source of demand for marine species is the recreation sport fishing industry. Using estimates generated by other studies of parameters for the demand for sport fisheries, and time series observations on variables which influence demand for sport fishing in the Chesapeake Bay, estimates were made of the time rate of change in social benefits attributable to ecological productivity of undeveloped wetlands. Other sources of value for undisturbed wetlands were also noted.

The findings were generally consistent with the view that institutional change in the case of the Virginia Wetlands Act was associated with an increase in the net social benefits associated with wetlands preservation, relative to benefits associated with development uses of wetlands.