Transcript CLASS Public Lecture Environmental Benefits and Costs

Jack L. Knetsch
6 September 2008
“A core set of economic assumptions should be
used in calculating benefits and costs”.
(Arrow, et al., 1996)
“Any measurement technique … should be
consistent with standard economic theory of
individual preferences and measurement of
welfare changes”.
(Freeman, 1993)
“The value of these types of events is that it’s
national, it creates a larger impact by
spreading out the new wealth.”
Construction of new stadium $105 million
Staging expenses
18 million
Associated spending
45 million
$168 million
Opting-In vs. Opting-Out
New employee enrollment in pension plan:
Information, but opt-in
25% enroll
Automatic unless opt-out
80% enroll
Organ donation concent:
U.S. (Opt-in)
Europe (Opt-out)
< 20%
> 80%
Measures of Economic Values
“Economic value of something is how much
someone is willing to pay for it or, if he has it
already, how much money he demands to part
with it”.
(Posner, 1986)
“… we shall normally expect the results to be so
close together that it would not matter which
we choose”.
(Henderson, 1941)
Value of Gain and Loss
50 percent Chance to Win $20
Means
Maximum Price to Gain
$ 5.60
Minimum Price to Lose
11.02
(Kachelmeier and Shehata, 1992)
Choice Between Goods
Final Outcome
Mug Chocolate
Choice of Good (N=55) 56%
44%
Initial Endowment:
Mug (N=76)
Chocolate (N=87)
89%
10%
11%
90%
Continuing Questioning and Reporting
of Contrary Results
“Disparity disappears with repeated trials”
Failure of Vickrey auction: 2nd vs 9th price
“Inexperience explains disparity”
Reference state of dealers vs. visitors
“Experimental procedures responsible”
Demonstrations manipulate reference, change
gain/loss to choice: of course, no disparity
Natural Experiments
Investors reluctant to realize losses:
Sell “winners” and keep “losers”
Shares sold return 3.4% more than those kept
(Odean, 1998)
Price elasticity of eggs:
Price decreases (gains, insensitive): -0.45
Price increases (losses, sensitive): -1.10
(Putler, 1992)
Standard Value Function
Value
Quantity
Value of Gains and Losses from
Reference State
Value
R
Quantity
“We suffer more … when we fall from a better to
a worse situation, than we ever enjoy when
we rise from a worse to a better”.
(Adam Smith, The Theory of Moral
Sentiments, 1759)
Choice of Project
Two Transportation Projects, A and B:
Equal: cost, beneficiaries, time saving
A: Shorten distance
B: Replace failed bridge, eliminate detour
Shorter Indifferent Replace
Univ. Students
18%
13%
69%
Econ Students
19%
21%
60%
Sing. Civil Serv.
13%
22%
65%
Int’l Experts
10%
20%
70%
Loss vs. Foregone Gain
Changing pension plan savings from payments from
current earnings (a loss) to foregoing a portion of
future wages (a foregone gain):
Savings rate from 3.5 percent of earnings,
to 15.6 percent in three years.
(Thaler and Benartzi, 2007)
Value of Gains and Losses from Reference State
Reference State and Measures of the
Value of Positive and Negative Changes
Reference
State
Basis of
Measure
Valuation Measure
Positive
Negative
Before Compensating WTP to
Change
Variation
Improve
WTA to
Accept Loss
After
Change
WTP Avoid
Inferior Ref
Equivalent
Variation
WTA Forego
Superior Ref
Time Preferences / Discount Rates
“The discount rate should be based … on how
individuals trade off current for future
consumption”.
(Arrow, et al., 1996)
Time Peferences and Reference Effect
Value of Change in Delivery of Prize
Speed-up delivery
Delay delivery
$14
30
Trade Current Days for 11 Future Days Holiday
Give up current days for future gain: 5.4 days
Gain current days for future loss:
11.7 days
The Reference State and Measures of
the Value of Future Gains and Losses
Ref
State
Before
Future
Change
After
Future
Change
Basis of
Measure
CV
EV
Valuation of
Future Gain
Future Loss
WTP Now
WTA Now to
for Future
Accept Future
Gain
Loss
WTA Now to
Forego Future
Superior Ref
WTP Now to
Avoid Future
Inferior Ref
Risk Aversion and Risk Seeking
(A) 80% Chance of
20% Chance of
or
(B) Certain
+$100
0
(C) 80% Chance of
20% Chance of
or
(D) Certain
-$100
0
+$80
-$80
Changes in Insecticide Risks
Risk Change
(Initial Level 15/10,000)
Inhalation Child Poisoning
Decrease:
-15
0
0
-15
-15
-15
-5
-5
-10
-10
Increase:
+1
+1
Money Value
WTP $2.69
WTP 4.28
WTP 8.09
WTP 1.84
WTP 2.38
WTA 3.38
(65% Refuse Purchase)
(Viscusi, et al., 1987)
Reference State and Measures of the
Value of Positive and Negative
Changes in Risk of Harm
Ref
Basis of
State Measure
Before
Change CV
After
Change
EV
Valuation of Risk Change
Positive
Negative
WTP to
WTA to Accept
Decrease
Increase
Risk
in Risk
WTA to Forego
Decreased Risks
to Superior Ref
WTP to Avoid
Increased Risk
to Inferior Ref
Survey Values of Changed Risks of
Having Bicycle Stolen
WTP to reduce risk
WTA to forego
reduced risk of ref
WTA to accept
increased risk
WTP to avoid
increased risk of ref
Mean
20.19
Median
12
46.29
35
41.59
30
16.53
10
(Knetsch, Tang, Zong, 2008)
Herbert Simon, 1986
“I think the textbooks are a scandal … I don’t
know of any other science that purports to be
talking about real world phenomena, where
statements are regularly made that are
blatantly contrary to fact.”