Measuring Environmental Benefits: Revealed Preference Approaches Travel Cost, Hedonic Price, and Household Production Methods

Revealed preference approaches Travel Cost Model: use data from actual vistations, 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. Household Production Model: households (people) bundle environmental goods with private goods to produce experience that enhances utility

Travel Cost Model: ANWR What is the use-value of Arctic National Wildlife Reserve? Current entrance fee = 0. Is the value = 0? v = # visits person makes to ANWR, X = other goods purchased by person, L = # hours worked by person at wage w. P 0 = out-of-pocket expenses to visit ANWR, F = entrance fee.

Effective price of trip t = travel time, s = visit time Price of a trip:  [P 0 +w(t+s) + F] Notice opportunity cost of time 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 ANWR. Will allow us to calculate consumer surplus Can calculate use-value of ANWR Can determine cost to consumers from e.g. entrance fee (from 0 to F 1 )

Demand for visits to ANWR F0F0 F1F1 V1V1 $ Demand OLD Consumer Surplus NEW Consumer Surplus V0V0 Visits

Procedure [1 of 2] Station students at park entrance on several “random” days. Ask visitors (1) zip code, (2) others (mode of travel, $ spent, socioeconomic…) Scale up to entire year, over entire pop: # visits/zip code/year Calculate travel cost from each zip code Divide into “zones” of equal travel cost E.g. Northern Alaska, Southern Alaska, BC, … lower 48, etc.

Travel cost “zones” Z=1 Z=2 Z=3 Z=4 Site Zones have equal travel cost within each zone.

Procedure [2 of 2] Calculate population (P z ) and estimated number of visits (S z ) from each “zone”. Calculate visitation rate: V z = S z /P z. Plot price (  z +F) vs. visitation rate (V z ). VzVz Price z

Hedonic Price Method: Urban Creeks Proposal to restore an urban creek. Costs easy to calculate, benefits more difficult. Benefit of restoring an urban creek? Basic idea: House prices (or other market goods) reflect quality of attributes. One attribute is proximity to nice creek. Ceteris paribus, houses near creek should be more valuable

If all houses identical Suppose all houses are identical in every respect except different distances from nice creek. House Price (P) Dist to creek (d) Use regression to estimate a “hedonic price function”

Value of a clean creek Suppose we look at houses at distances 0 miles, 1 mile, 2 miles, etc... H(d) = # houses at distance d, (H=total #) Value of the creek is increase in value of housing stock with and without the creek: [H(0)*P(0) + H(1)*P(1) +… ] – [  H(i)*P(  )] Explain formula.

But all houses are not identical Want to “control” for other characteristics of house that affect its price. Size (s), age (a), schools (h), condition (c), view (v), etc. P(d) becomes P(s, a, h, c, v, …) – use multiple regression instead of single. Rest of analysis is same. Note: For continuous change (small change in noise from SBA changing flight schedules) calculate “marginal damage from noise”.

Hedonic pricing to value risks What is the cost of additional occupational risk? Hedonics provides a way to estimate. Compare different occupations with different risks of mortality, estimate hedonic price function

Occupations similar except risks OccupationWage (hourly) Risk of Death (statistically) Backhoe operator$ Bulldozer$ Grader operator$ Lawnmower$

Hedonic price function Wage Prob death (  … 1.0 Calculate W(  ). dW/d  = marginal value of risk “Value of Statistical Life” is found By extrapolating to  = 1.0. VSL VSL typically $3-$6 million