1. Revealed-preference methods
Outline
Hedonic pricing method
Travel cost method
Davao study

2. Readings
Lesser et al., pp ,
Choe, Whittington, Lauria

3. Hedonic pricing method
Measures how the characteristics of a marketed asset, including environmental attributes, affect its price
Typically applied to housing: “hedonic property method”
Earliest application: Ridker (1967)
Has also been applied to agricultural land
Can also be applied to wages: “hedonic wage method”
Job selection might reflect regional amenities or occupational health risks

4. Common observations Houses near airports tend to sell for lower prices
So do houses downwind from oil refineries and slaughterhouses
Houses with panoramic views tend to sell for higher prices
Hence, although there are no markets for noise, smell, or view, such environmental characteristics can affect house prices

5. Hedonic property method: basic idea
Housing is made up of several characteristics, including environmental quality, that determine its value
The price of a house is the sum of the products of the implicit prices of those characteristics times the amounts of the characteristics in the house
Statistical methods can be used to decompose house price into these implicit prices, as long as the characteristics vary within the sample of houses

6. Revealed preference method
Synonym: “indirect” method
Analyze “behavioral trail” left by individuals’ actual decisions, not what individuals say they would do (“stated preferences”) under hypothetical conditions
Implications: cannot use revealed preference methods to value new goods, or changes outside range of current conditions

7. Surrogate markets
Housing market is not really a market for houses, but rather a surrogate market for the characteristics of houses
Similarly, demand for parks is not really demand for parks per se, but rather demand for different environmental services provided by parks (travel cost method)

8. Types of values that hedonic property method can estimate
Use values
Among non-use values, perhaps option values, but not others (e.g., existence)

9. Typical applications
Ambient environmental quality: air, water, noise, odor pollution
Proximity to noxious sites: dumps, incinerators, airports
Natural hazards: floods, earthquakes, landslides, radon
Proximity to desirable amenities: beaches, parks, vistas, cultural sites

10. Hedonic price function
Relationship between price and attributes:
PH = 0 + 1A1 + 2A2 + 
PH = price of house
A1 = airport noise
A2 = size of house
 = error term
0, 1, 2 = coefficients
Econometric methods (multivariate regression) can be used to estimate the coefficients

11. For the linear function
PH = 0 + 1A1 + 2A2 + ,
the implicit price for amenity A1 is just the coefficient 1:
PH/A1 = 1

12. Example: Housing and air pollution in U.S.

13. Travel cost method: basic idea
The “price” of using a recreation site is not only the entry fee, but also the monetary and time costs of traveling to it

14. Travel cost method: basic idea
The “price” of using a recreation site is not only the entry fee, but also the monetary and time costs of traveling to it
Visitors who live at different distances from the site thus face different implicit prices

15. Travel cost method: basic idea
The “price” of using a recreation site is not only the entry fee, but also the monetary and time costs of traveling to it
Visitors who live at different distances from the site thus face different implicit prices
We can estimate a demand curve for the site by relating the number of visits to the total travel cost

16. Entry fee vs. Implicit price
Parks often have no entry fee, or fee hasn’t varied over time or across users
Cannot estimate a demand curve if there’s no price variation
Analyze demand as a function of implicit price: total cost of visiting park, not just entry fee

17. History of TCM
One of oldest and most frequently used valuation methods
Concept is due to Harold Hotelling, in response to request from National Park Service in the late 1940s
Operationalized by Marion Clawson in the 1950s
Refined by Jack Knetsch in the 1960s

18. Recreational applications
National parks and other protected areas
Sporting sites (hunting, fishing)
Archaeological sites
Cultural sites (museums)

19. Other applications Collection of fuelwood Collection of water
In principle, can be applied to any good whose consumption involves travel-related costs

20. Related terminology
Revealed preference method: TCM is a prime example of this category of valuation methods, which infer WTP or WTA from observed (not hypothetical) behavior

21. Related terminology
Revealed preference method: TCM is a prime example of this category of valuation methods, which infer WTP or WTA from observed (not hypothetical) behavior
Surrogate market method: demand for transportation services is surrogate for demand for environmental amenities at destination

22. Types of travel cost models
Zonal: average data on visitors; a given site
Individual: data on individual visitors; a given site
Multi-site (ditto): data on individual visitors; a set of sites
Hedonic: average or individual data on visitors; characteristics of a given site

23. Features that are common across TCM models
Typically implemented using cross-sectional data
Econometric-based
Two-stage procedure to obtain estimates of consumer surplus

24. Davao study: individual TCM
Asked each household (i) annual number of visits it made to Times Beach before and after health advisory (Vi0, Vi*)

25. Calculated prices of visits to Times Beach (pi) and substitute sites (sij) as sum of:
Roundtrip travel costs
E.g., bus fare
Costs of roundtrip travel time
Assumed cost per hour equaled half of hourly wage rate
There’s no entry fee
If there were, it should be included, too

26. Pooled data across households and estimated demand functions (“trip generating functions”) that relate annual number of visits to pi, sij, household income (yi), and other socioeconomic characteristics (hi):
Vi0 = b00 + b10pi + b20sij + b30yi + b40hi + i
Vi* = b0* + b1*pi + b2*sij + b3*yi + b4*hi + i
What do we expect the signs of the coefficients to be?

28. For each household, calculated difference in consumer surplus between the two demand functions
This can be interpreted as the household’s WTP for restoring Times Beach
Do we interpret it as compensating variation, equivalent variation, or something else?

29. Calculating consumer surplus
For each household, plug in actual values for sij, yi, and hi and rewrite demand functions as
Vi = ci + b1pi
where ci = b0 + b2sij + b3yi + b4hi

30. Calculating consumer surplus
For each household, plug in actual values for sij, yi, and hi and rewrite demand functions as
Vi = ci + b1pi
where ci = b0 + b2sij + b3yi + b4hi
Solve for pi: pi = –ci/b1 – Vi/b1
Can interpret intercept, –ci/b1 , as choke price: price that causes number of visits to drop to zero: Vi = 0

31. Calculating consumer surplus
For each household, plug in actual values for sij, yi, and hi and rewrite demand functions as
Vi = ci + b1pi
where ci = b0 + b2sij + b3yi + b4hi
Solve for pi: pi = –ci/b1 – Vi/b1
Can interpret intercept, –ci/b1 , as choke price: price that causes number of visits to drop to zero: Vi = 0
Calculate consumer surplus by applying the formula,
MCS = ½(–ci/b1 – pi)Vi

32. WTP: TCM vs. CVM
TCM: pesos/month

33. WTP: TCM vs. CVM TCM: 36 pesos/month
CVM (Scenario 1, mean for households that used beach before advisory): 37 pesos/month

34. WTP: TCM vs. CVM TCM: 36 pesos/month
CVM (Scenario 1, mean for households that used beach before advisory): 37 pesos/month
Looks good, but:
CVM yields WTP for well-defined reference utility level ; TCM yields Marshallian WTP
CVM measures use and non-use values; TCM measures only use values
CVM measures WTP for cleaning up river and sea; TCM measures WTP just for Times Beach

35. Time costs
Time has an opportunity cost (OC), both while traveling and while on site
Time-related costs are often the largest portion of total travel costs

36. OC of time and the wage rate
Does OC of time equal the pre-tax wage rate?

37. OC of time and the wage rate
Does OC of time equal the pre-tax wage rate?
No: taxes drive a wedge between OC of time and gross compensation
How about post-tax wage?

38. OC of time and the wage rate
Does OC of time equal the pre-tax wage rate?
No: taxes drive a wedge between OC of time and gross compensation
How about post-tax wage?
Overstates OC of time if work involves nonpecuniary costs (stress)
Is time fungible between work and travel?

39. OC of time and the wage rate
Does OC of time equal the pre-tax wage rate?
No: taxes drive a wedge between OC of time and gross compensation
How about post-tax wage?
Overstates OC of time if work involves nonpecuniary costs (stress)
Is time fungible between work and travel?
Can work while traveling (laptops), or might not be able to work if not traveling (institutional constraints)

40. OC of time and the wage rate
Does OC of time equal the pre-tax wage rate?
No: taxes drive a wedge between OC of time and gross compensation
How about post-tax wage?
Overstates OC of time if work involves nonpecuniary costs (stress)
Is time fungible between work and travel?
Can work while traveling (laptops), or might not be able to work if not traveling (institutional constraints)
People might enjoy travel itself
Usual assumption: OC of time equals 25-50% of pre-tax wage