1. AGEC 608 Lecture 09, p. 1 AGEC 608: Lecture 9 Objective: Assess “existence value” and describe the method of partitioning of benefits Readings: –Boardman, Chapter 9 Homework #3: Chapter 4, problem 2 Chapter 5, problem 1 Chapter 6, problem 4 due: March 27 Homework #4: Chapter 7, problem 3 Chapter 10, problems 1 + 2 Chapter 13, problem 3 due: April 11

2. AGEC 608 Lecture 09, p. 2 Existence value People derive value from resources, even if those resources are not “used” in any of the conventional senses. Four complications: 1. Distinguishing nonuse from passive use 2. Separating use value from nonuse value 3. Assessing the impact of quantity changes 4. Problems of motivation and measurement

3. AGEC 608 Lecture 09, p. 3 Use values Active use Rivalrous consumption (logging forest) Direct nonrivalrous consumption (hiking in forest) Indirect nonrivalrous consumption (watching film) Passive use option value (possibility of visiting in future) pure existence value (intrinsic value of resource) altruistic existence value (others hiking) bequest value (future hikers)

4. AGEC 608 Lecture 09, p. 4 Distribution of benefits typically depends on type of benefits Example 1 Study of nature sites in Great Britain by Willis Active use (10-12% of WTP) Option value (10-12% of WTP) Passive/nonuse (remainder, key to NB>0)

5. AGEC 608 Lecture 09, p. 5 Distribution of benefits typically depends on type of benefits Example 2 Study of Camden Yards by Hamilton and Kahn (standing only for Maryland residents) Jobs $ 0.48 million Outside taxes $ 1.25 million Admission taxes $ 1.20 million Sales taxes $ 0.43 million Annual costs-$14.00 million Net benefits-$10.64 million Any existence value?

6. AGEC 608 Lecture 09, p. 6 How to measure existence values? In general, a very difficult problem Direct elicitation difficult to partition benefits Behavioral “traces” membership dues markets for substitutes or complements time allocation

7. AGEC 608 Lecture 09, p. 7 Partitioning benefits Hypothetical policy with multiple benefits Goods: E (price P e ) existence value X (price P x ) hiking Z (price P z ) everything else Q = quality of resources Utility function U(E, X, Z; Q) = QE a + QX b + Z c Budget B = P e E + P x X + P z Z Maximize U – λ[B- P e E - P x X – P z Z]

8. AGEC 608 Lecture 09, p. 8 Partitioning benefits Some numerical assumptions: Q=1 a = 0.50 b = 0.75 c = 0.90 P e = 0.50 P x = 1 P z = 2 B = 100

9. AGEC 608 Lecture 09, p. 9 Partitioning benefits Solution: E (price P e ) existence value X (price P x ) hiking Z (price P z ) everything else Q = quality of resources Utility function U(E, X, Z; Q) = QE a + QX b + Z c Budget B = P e E + P x X + P z Z Maximize U – λ[B- P e E - P x X – P z Z]

10. AGEC 608 Lecture 09, p. 10 Partitioning benefits Approach: 1. solve for a “base” level of utility, at a given set of prices, for a given budget constraint. 2. set a price for one or more goods at which demand goes to 0 this is called the “choke price” 3. find the level of expenditure on other items at which the utility level in (2) is the same as in (1). 4. The difference in expenditure level is the value of the good.

11. AGEC 608 Lecture 09, p. 11 Partitioning benefits Numerical example: www.agecon.purdue.edu/staff/shively/courses /AGEC608/lectures/partioning.xls