Measuring Environmental Benefits: Revealed Preference Approaches

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Measuring Environmental Benefits Revealed
Preference Approaches

• Travel Cost and Hedonic Methods

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Motivation Generic Group Projects

• 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?

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Revealed preference approaches (two most common)

• 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.
• House prices influenced by environmental amenity
  (eg noise)
• Wages influenced by riskiness of job

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1. Travel Cost Model Yosemite

• Need to know the demand for park visits (note
  this reflects use value only)
• Current entrance fee20. (Is this related in
  any way to the parks value? How?)
• Goal empirically develop demand curve for visits
• Typical visitor
• 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 P0w(ts) F

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Effective price of trip

• Price of a trip p P0w(ts) 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.

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Objective

• Want to derive a demand curve for visits to
  Yosemite.
• What can we do with a demand curve?
• 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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OLD Consumer Surplus
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F1
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F0
Demand
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V1
Visits
V0
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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.

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Travel cost zones
Yosemite
Z1
Z4
Z3
Z2
Zones have equal travel cost within each zone.
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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(p,y,d) f(TCF,y,d)
• Plot price (pz) vs. visitation rate (vz)
  scatter plot
• Perform multiple regression to control for income
  (y) and other variables (d)

Price, pz
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f
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vz
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Procedure (Step 3 of 3)

• 6. Vary F from 0 to some upper bound for each
  F
• Calculate visits for each zone, using
  vf(TCF,y,z) and characteristics of zone
• Add up over all the zones to obtain total visits
  to the park for each F
• 7. Voila Demand curve!
• Visits as a function of entrance fee, F

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Demand curve
Demand for visits to Yosemite
Entrance Fee, F
Number of visits, V
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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

• Do you trade off risks to your life with money?

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2. Hedonic pricing to value risks

• 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.

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Occupations similar except risks
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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 p 1.0.
VSL typically 3-6 million From wage-risk studies
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VSL
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Prob death (p)

1.0
.0001
.0002
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Correct Interpretation

• 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 .001100,000100.
• If VSL6M, then benefits are 600M.
• Correct interpretation is that each member of
  population benefits by .0016M6,000. Since
  100,000 people benefit, total benefit is 600M.

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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
Hedonic Price Function
House Prices
x
x
x
x
x
x
x
x
x
x
x
x
Noise Level
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What is missing?

• All other factors that affect house price
• Lot size
• Rooms/Bathrooms
• House age
• School quality
• Etc.
• Can control for these using multiple
  regression.acts like an experiment.

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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
• Travel cost (household production)
• Hedonic (typically housing or wage-risk studies)

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Valuing recreational non-consumptive use of MPAs

• Bren GP 2004
• What is the value of MPAs for recreational
  non-consumptive 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

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Demand with and without MPAs
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Predicted Visitation
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Average Visitor Surplus