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Measuring Environmental Benefits: Revealed Preference Approaches

Travel Cost and Hedonic Methods

Motivation: Generic Group Projects

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?

Examine cutting back flights at SBA because of noise in surrounding area.

Is noise a problem that justifies this? How much does noise depress property values?

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”. 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 (e.g. noise)Wages influenced by riskiness of job

1. Travel Cost Model: YosemiteNeed 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 visitsTypical 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

Effective price of trip

Price of a trip: [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?

Calculate consumer surplus (benefits) – review concept on board…Can calculate use-value of YosemiteCan determine cost to consumers from e.g. entrance fee (from F0 to F1)

Demand for visits to Yosemite

F0

F1

V1

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.Demand

OLD Consumer Surplus

NEW Consumer Surplus

V0Visits

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 parkUse knowledge of total number of visits to park per yr

2. Calculate travel cost from each zip codeUse travel time, travel costs, wages in zip code

This, with the entrance fee, is the “price” of a visit: = TC +F

3. Sort zip codes into “zones” of equal travel costE.g. Sacramento, Santa Barbara, Germany, … , etc.

Travel cost “zones”

Z=1

Z=2

Z=3Z=4

Yosemite

Zones have equaltravel cost withineach zone.

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 ratev = f(π,y) = f(TC+F,y)Plot price (z) vs. visitation rate (vz) – scatter plotPerform multiple regression to control for other variables (y)

vz

Price, πz

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f

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) and characteristics of zoneAdd 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

Demand curve

Entrance Fee,F

Number of visits, V

Demand for visits to Yosemite

Finish your analysis

Use demand curve to advise head SmokeyCalculate revenue from different park entrance fees

2. Hedonic pricing to value risks

Do you trade off risks to your life with money?

2. Hedonic pricing to value risksDo you trade off risks to your life with money?Observe: workers willing to undertake risk for increased payObserves wage-risk tradeoffs in labor marketHedonics: Compare different occupations with different risks of mortalityAssumes workers are aware of risks and that they are perfectly internalized.Assumes only real difference between occupations is level or risk.

Occupations similar except risks

Occupation Wage (hourly)

Risk of Death (statistically)

Backhoe operator

$15 .0001

Bulldozer $16 .00015

Grader operator

$17 .0002

Lawnmower $18 .00025

VSL: Willingness to pay for marginal reduction in risk to life (VSL)

Wage

Prob death (

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.0001 .0002 … 1.0

Calculate W().dW/d = VSL (Value of Statistical Life)Wrong interpretation: change in wage when risk changes from = 0 to π = 1.0.

VSL

VSL typically$3-$6 millionFrom wage-risk studies

VSL Studies (1990 US$)

Australia (1984): $3.3 millionJapan (1986): $7.6 millionUS (1982): $16.2 millionCanada (1979): $3.6 millionUK (1977): $2.8 millionUS (1976): $6.5 million

Caution: ignores age & health

Hedonic Price Analysis

Estimate marginal effect of noise of house prices

Control for other characteristics using multiple regression

Compute price effects of reduced noise at airportApproximation of willingness-to-pay for noise reduction

Hedonic Analysis of Property Values

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Hedonic Price Function

Noise Level

HousePrices

Conclusions

Revealed preference methods desirable for valuing environmental benefitsRelies on “fortuitous” association of markets with environmental goods – not that commonTwo basic methods

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

Next: “Stated” preference approaches