Department of Economics

Faculty of Economics and Business

Universitas Indonesia
Mid Exam Environmental Economics
Odd Semester 2020/2021
Friday, 6 November 2020; 150 minutes (2.5 hours)
Lecturer: Alin Halimatussadiah

Instructions
1. The exam consists of two questions, each of them have score 50 points.
2. In answering each (sub-)question, please consider the length and the depth of your
answer according to the points given for the specific question.
3. Use your best knowledge (theory, tools) learnt in the lecture sessions to answer the
case studies.

Note: Regarding technical issue of file submission, please see the instructions given before.

Question 1 (50 points)

The government has plan to close the Komodo National Park to improve the habitat of the
Komodo. The closing is hopefully can increase the population of deer and reduce the risk of
cannibalism among Komodos. The government has limited funding to perform such plan.
You suggest to conduct a valuation study to support the plan.

The questions to the study case problem:

1. (5 points) (Re-)state the problem
2. (5 points) (Re-)state the purpose of valuation
3. (5 points) What environmental goods/service that need to be valued
4. (10 points) Choose the appropriate valuation method and explain why
5. (15 points) Identify the steps that you have to make to conduct such study
6. (10 points) Identify the data that you need, and/or the main question of your
questionnaire

Question 2 (50 points)

Please read the passage carefully and answer the questions.

In 2012, the Governor of Bali issued a decree granting a permission to PT. TPU for utilization
and development of Benoa Bay covering an area of 838 ha. This area is planned to be an
integrated tourism area that includes green land, cultural parks, recreational parks (like a
Disneyland), social and public facilities, hospitals, marina housing that allows private boats or
yachts to dock, hotels, apartments, shopping centers, sports facilities, and even a plan to build
an international F1 circuit. Benoa Bay reclamation is expected to improve the welfare of the
community through increased tourism activities. This project is estimated to cost around 30
trillion rupiah, with construction and other work taking about 5 years.

With the increasing price of land in Benoa Bay, the reclamation option is indeed more
promising. The cost of reclamation is estimated to be half when compared to building
properties in land areas. This project will not only provide benefits for developers, but also
generate multiplier effects by increasing the economic activities of the surrounding

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Department of Economics
Faculty of Economics and Business
Universitas Indonesia
communities. The net profit per visitors is estimated at 3 million rupiah. PT. TPU also predicts
that the expected visitor is 2 million people per year. However, tourism experts suggest that
this number is an optimistic scenario.

The economic impact does not only appear when the project is completed and tourism
activities are running, but also from the start of construction activities. The developer claims
that the multiplier effect at the construction period reaches 500 billion per year and when
operated reaches 2.5 trillion per year.

PT. TPU realizes that developing this area requires lobbying the central government and
managing the aspirations of the developing community. Because of that the company has
already allocated funds for this amounting to a maximum of 1 trillion rupiah.

From the results of a study by consultant, it is estimated that the construction costs could
increase by a maximum of 20% of the budget plan for this type of reclamation development.

Apart from the optimistic economic benefits mentioned, this activity was alleged to have
several implications for the environment which in turn affected people's welfare. The impact
occurred not only during the construction period but also after tourism activities began. A
research institute that concern on environment has estimated some of the possible impacts
of this project.

Overview of Benoa Bay and the Impact of Reclamation Activities

Benoa Bay can be considered as the largest mangrove area forests in Bali. The total area of
the mangrove forest in Benoa Bay is 1,394.5 Ha or 63% of the total area of mangrove forest in
Bali.

Birds are dominant fauna in the site. The diversity of bird species in the mangrove ecosystem
is the main attraction of bird watching ecotourism. According to one study, the Benoa Bay
mangrove forest is a habitat for more than 94 species of birds. Some of these bird species are
water birds that depend on the Benoa Bay as their food habitat. Therefore, the existence of
Benoa Bay plays an important role in supporting bird conservation.

The mangrove ecosystem is a feeding ground for tidal migratory fish, a spawning ground and
a nursery ground for juveniles and young fish because it is supported by an abundance of food
sources and protect them from predators.

In addition to the mangrove ecosystem, a rich coral reefs grow along the Benoa Bay to form
barrier reef formations side by side with seagrass ecosystem. Physically, this barrier reef is a
stronghold for protection of the coasts from the threat of erosion / abrasion caused by the
action of waves and the sea currents of the Badung Strait.

From the fisheries point of view, the coral reef ecosystem around Benoa Bay supports the
livelihoods of traditional and small fishermen that searching for decorative fish (ikan hias) to
be sold to the market and taking fish for their household consumption. The sea around the
bay also important as they serve many kind of dominant commodity for the market such as

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Department of Economics
Faculty of Economics and Business
Universitas Indonesia
white snapper. Meanwhile, in terms of recreation and tourism aspects, the coral reef
ecosystem in the area around Benoa Bay (Sanur, Serangan, Tanjung Benoa and Nusa Dua) is a
tourist attraction that supports the diving tourism industry (scuba diving, snorkelling and
hookah). The diving tourism industry has experienced rapid development in recent years and
has become one of the mainstay tourism businesses and an attractive tourism destinations.

If the reclamation is carried out, changes in sea currents in the bay area, especially during the
rainy season, will cause the river flow that goes into the bay area to spill quite high water
discharge, and threaten the areas with flooding covering an area of 1,596 hectares including
Ngurah Rai Airport.

The reclamation process also requires sand to create new lands. This dredging process from
elsewhere will create changes in ocean flow patterns and carbon oxidized. The process of
dredging and stockpiling sand will also eliminate coral reefs, including rich coral reef areas. In
addition, there is a risk of land subsidence due to the massive use of groundwater by hotels
and other tourism infrastructures. This risk is not only in the reclamation area but also in other
areas in Badung, the districts with the largest number of hotels in Bali.

Point of view
You are an undergraduate student who is doing a thesis about this case. From the information
that has been collected, you create the following table:

Table of Parameters

General Inputs
Social discount rate 4% rate
Private discount rate 8% rate
Project duration 40 yrs
Construction phase 5 yrs

Project Benefits
Net profit per tourist 3.0 million IDR/year
Number of tourist 2,000,000 tourist/year

Costs
Construction cost (Years 0 - 4) 30,000,000 million IDR
Legal and social intervention 1,000,000 million IDR
Construction cost overrun factor 0% %

External benefits
Economic multiplier effect at operation phase 2,500,000 million IDR/year
Economic multiplier effect at construction phase 500,000 million IDR/year

External costs
External cost at construction phase 3,000,000 million IDR/year
External cost at operation phase 6,000,000 million IDR/year

Summary of Results
Financial Value 16,138,688 million IDR
Economic Value (16,233,604) million IDR

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Department of Economics
Faculty of Economics and Business
Universitas Indonesia
Questions
1. One of the environmental impacts that can arise from the reclamation project in Benoa
Bay is the damage to mangrove areas. What environmental services do mangrove
ecosystems provide? Map the environmental services given by the ecosystem using
the table below (10%)

Category Direct Use Indirect Use Option Value Non-use

Value Value Value
Provisioning
Regulating
Cultural
Habitat/
Supporting

2. In your opinion, who will be affected positively or negatively by this project? And what
kind of impact do they get? (5%)

3. In your opinion, is this project feasible? Please explain (5%)

4. If you are the proponent of the project, would you continue this activity? Please
explain (5%)

5. If you are the policy maker, would you continue this activity? Please explain (5%)

To complete the analysis, you also conduct a sensitivity analysis with the result as follows:

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Department of Economics
Faculty of Economics and Business
Universitas Indonesia

1,600,000.0 1,800,000.0 2,000,000.0 2,200,000.0 2,400,000.0 number of tourist

10,547,725
private discount rate 6% IDR13,885,398 IDR19,094,902 IDR24,304,406 IDR29,513,910 IDR34,723,414
7% IDR7,833,470 IDR12,228,062 IDR16,622,654 IDR21,017,247 IDR25,411,839
8% IDR3,063,627 IDR6,805,676 IDR10,547,725 IDR14,289,773 IDR18,031,822
9% -IDR719,774 IDR2,495,044 IDR5,709,863 IDR8,924,681 IDR12,139,499
10% -IDR3,738,469 -IDR953,379 IDR1,831,711 IDR4,616,802 IDR7,401,892

Construction cost over run 10,547,725 1,600,000.0 1,800,000.0 2,000,000.0 2,200,000.0 2,400,000.0
0% IDR3,063,627 IDR6,805,676 IDR10,547,725 IDR14,289,773 IDR18,031,822
5% IDR1,769,989 IDR5,512,038 IDR9,254,087 IDR12,996,135 IDR16,738,184
10% IDR476,351 IDR4,218,400 IDR7,960,448 IDR11,702,497 IDR15,444,546
15% -IDR817,287 IDR2,924,762 IDR6,666,810 IDR10,408,859 IDR14,150,908
20% -IDR2,110,925 IDR1,631,124 IDR5,373,172 IDR9,115,221 IDR12,857,269

Sensitivity Analysis - Economic NPV

(10,259,361) 1,600,000.0 1,800,000.0 2,000,000.0 2,200,000.0 2,400,000.0 number of tourist

social discount rate 1% -IDR13,268,201 IDR972,310 IDR15,212,821 IDR29,453,331 IDR43,693,842
2% -IDR18,590,399 -IDR7,195,493 IDR4,199,413 IDR15,594,319 IDR26,989,225
3% -IDR22,490,834 -IDR13,270,397 -IDR4,049,960 IDR5,170,478 IDR14,390,915
4% -IDR25,345,246 -IDR17,802,304 -IDR10,259,361 -IDR2,716,419 IDR4,826,523
5% -IDR27,424,889 -IDR21,188,361 -IDR14,951,834 -IDR8,715,307 -IDR2,478,780

environmental risk (10,259,361) 1,600,000.0 1,800,000.0 2,000,000.0 2,200,000.0 2,400,000.0 number of tourist
6,000,000 -IDR25,345,246 -IDR17,802,304 -IDR10,259,361 -IDR2,716,419 IDR4,826,523
7,000,000 -IDR37,916,817 -IDR30,373,874 -IDR22,830,932 -IDR15,287,990 -IDR7,745,047
8,000,000 -IDR50,488,387 -IDR42,945,445 -IDR35,402,503 -IDR27,859,560 -IDR20,316,618
9,000,000 -IDR63,059,958 -IDR55,517,015 -IDR47,974,073 -IDR40,431,131 -IDR32,888,188
10,000,000 -IDR75,631,528 -IDR68,088,586 -IDR60,545,644 -IDR53,002,701 -IDR45,459,759

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Department of Economics
Faculty of Economics and Business
Universitas Indonesia
Questions
6. Do you think the sensitivity analysis used in this analysis is appropriate? Give your
arguments. (Hints: see parameter -variable and value- used). (10%)

7. After you have performed this sensitivity analysis, what would you recommend if you
are a consultant of the developer? (5%)

8. After you had performed this sensitivity analysis, what would you recommend if you
are an economic advisor to the local government? (5%)