Transcript Measuring Environmental Benefits: Revealed Preference

Measuring Environmental
Benefits: Revealed
Preference Approaches
Travel Cost and Hedonic Methods
Motivation: Generic Group
Projects
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Chief “smokey” at Yosemite National Park
needs to raise $10 million for bus system in
park through increase in entrance fee.
What should be the fee increase to pay for
this?
You have been contracted to examine
cutting back flights at SBA because of noise
in surrounding area. Question: Is noise a
problem that justifies this? How much does
noise depress property values?
Revealed preference
approaches
(two most common)
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Travel Cost Model: use data from actual
visitations, estimate cost of travel, derive demand
curve for visits to the “site”. (A type of “Household
Production” model)
Hedonic Price Method: compare products with
similar attributes but one “bundles” an
environmental good, derive demand for the
environmental good.
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House prices influenced by environmental amenity
(eg noise)
Wages influenced by riskiness of job
1. Travel Cost Model:
Yosemite
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Need to know the demand for park visits (note: this
reflects use value only)
Current entrance fee=$20. (Is this related in any way to
the park’s value? How?)
Goal: empirically develop demand curve for visits
Typical visitor
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L = # hours worked by person at wage w.
P0 = out-of-pocket expenses to visit Yosemite,
F = entrance fee.
t = travel time, s = visit time
Price of a trip: p = [P0+w(t+s) + F]
Effective price of trip
Price of a trip: p = [P0+w(t+s) + F]
 Notice opportunity cost of time (w)
 This assumes we value travel time
and visitation time at the wage rate of
the individual.
 Value of time ranges, but is often
estimated at 1/3 or 1/2 the wage rate.
Objective
Want to derive a demand curve for
visits to Yosemite.
 What can we do with a demand
curve?
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Calculate consumer surplus (benefits)
– review concept on board…
 Can calculate use-value of Yosemite
 Can determine cost to consumers
from e.g. entrance fee (from $20 to F1)
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Demand for visits to
Yosemite
$
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NEW Consumer Surplus
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F1
OLD Consumer Surplus
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F0
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V1
V0
Demand
Visits
Procedure [1 of 3]
1. Station students at park entrance on several “random” days.
 Ask visitors (1) zip code, (2) other stuff (mode of travel, $ spent,
socioeconomic characteristics…)
 Scale up answers to entire year, over entire pop:
 # visits/zip code/year to park
 Use knowledge of total number of visits to park per yr
2. Calculate travel cost from each zip code
 Use travel time, travel costs, wages in zip code
 This, with the entrance fee, is the “price” of a visit: p = TC +F
3. Sort zip codes into “zones” of equal travel cost
 E.g. Sacramento, Santa Barbara, Germany, … , etc.
Travel cost “zones”
Yosemite
Z=1
Z=3
Z=2
Zones have equal
travel cost within
each zone.
Z=4
Procedure [2 of 3]
4. For each zone,
 Calculate population (Pz) of zone
 Estimate number of visits (Sz) from zone
 Calculate visitation rate: vz = Sz/Pz.
5. Estimate relationship between price and visitation rate
 v = f(π,y,d) = f(TC+F,y,d)
 Plot price (pz) vs. visitation rate (vz) – scatter plot
 Perform multiple regression to control for income (y) and other
variables (d)
Price, πz .
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f
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..
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vz
Procedure (Step 3 of 3)
6. Vary F from 0 to some upper bound; for each
F:
Calculate visits for each zone, using
v=f(TC+F,y,z) and characteristics of zone
 Add up over all the zones to obtain total visits
to the park for each F
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7. Voila: Demand curve!
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Visits as a function of entrance fee, F
Demand curve
Entrance Fee,
Demand for visits to Yosemite
F
Number of visits, V
Finish your analysis
Use demand curve to advise head
Smokey
 Calculate revenue from different park
entrance fees
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2. Hedonic pricing to value
risks
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Do you trade off risks to your life with money?
2. Hedonic pricing to value
risks
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Do you trade off risks to your life with money?
Observe: workers willing to undertake risk for
increased pay
Observes wage-risk tradeoffs in labor market
Hedonics: Compare different occupations with
different risks of mortality
Assumes workers are aware of risks and that they are
perfectly internalized.
Assumes only real difference between occupations is
level or risk, but can control for some other variables.
Occupations similar except
risks
Occupation
Backhoe operator
Wage
(hourly)
$15
Risk of Death
(statistically)
.0001
Bulldozer
$16
.00015
Grader operator
$17
.0002
Lawnmower
$18
.00025
VSL: Willingness to pay for
marginal reduction in risk to life
Wage
Calculate W(p).
dW/dp = VSL (Value of Statistical Life)
Wrong interpretation: change in wage when
risk changes from p = 0 to π = 1.0.
VSL
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.0001
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VSL typically
$3-$6 million
From wage-risk studies
.
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.0002
…
1.0
Prob death (p)
“Correct Interpretation”
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Suppose a new health regulation decreases
risk of death by .1% for all citizens in a city
with population 100,000.
Expected number of “statistical lives” saved
by regulation is .001*100,000=100.
If VSL=$6M, then benefits are $600M.
Correct interpretation is that each member
of population benefits by .001*6M=$6,000.
Since 100,000 people benefit, total benefit
is $600M.
VSL Studies (1990 US$)
Australia (1984): $3.3 million
 Japan (1986): $7.6 million
 US (1982): $16.2 million
 Canada (1979): $3.6 million
 UK (1977): $2.8 million
 US (1976): $6.5 million
Caution: ignores age & health
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Hedonic Analysis of Property
Values
House
Prices
Hedonic Price Function
x
x
x
x
x
x
x
x
x
x
x
x
Noise Level
What is missing?
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All other factors that affect house price
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Lot size
Rooms/Bathrooms
House age
School quality
Etc.
Can “control” for these using multiple
regression….acts like an experiment.
Hedonic Price Analysis
Estimate marginal effect of noise of
house prices
 Compute price effects of reduced
noise at airport
 Approximation of willingness-to-pay
for noise reduction
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Conclusions
Revealed preference methods desirable for
valuing environmental benefits
 Relies on “fortuitous” association of markets
with environmental goods – not that common
 Two basic methods
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Travel cost (household production)
 Hedonic (typically housing or wage-risk studies)
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Valuing recreational nonconsumptive use of MPAs
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Bren GP 2004
What is the value of MPAs for recreational nonconsumptive users?
 Counterfactual is critical
 Reserves had just been implemented
Zonal travel cost on charter boats
 Condition on: socioeconomic, expected quality,
expected impact of reserves, knowledge of reserves
 Regress VR on travel cost, income, substitutes, etc.
Result: value of recreation was high (around $10-$15
surplus per visit), but current value of MPAs low
Demand with and without
MPAs
Predicted Visitation
Average Visitor Surplus