Assignment #6 Environmental Economics ECON 409 / AEM 451 Distributed April 26, 2008; due in person or in Dan Shawhan s Warren room 105 mailbox by 3 pm Thursday, May 1. Reminder: our May 1 class will be in Warren 401 starting at 2:30. You are welcome to work with others, but your write-up must be your own. You may want to do problem 2 before problem 1, so that you have a more intuitive understanding of the hedonic approach when you discuss it in problem 1. 1. Environmental valuation: Three methods of valuing nonmarketed goods The Dreamworks movie company is seeking to buy the Ballona Wetland from the City of Los Angeles and replace it with a major film studio.1 The Ballona Wetland is the only major wetland remaining in Los Angeles. The wetland is home to diverse aquatic and bird life. It is cherished by many people who live near it and it attracts visitors from all parts of Los Angeles. The City Council is willing to sell, but wishes to set the price equal to the estimated net damages to all (human) parties other than Dreamworks. That way, Dreamworks will choose to buy the land only if its private net benefit of locating the studio there is greater than the net damages to others. You are the chief staff economist of the City Council. As part of the calculation of the net damages to all parties other than Dreamworks, you need to estimate the damage from the elimination of the wetland. Among the three approaches for valuing the site are the travel cost approach, hedonic approach, and <a href="/keyword/contingent-valuation/" >contingent valuation</a> approach. a) For each of the three approaches just mentioned, explain in a few sentences how you would conduct a study that uses it. b) Write a willingness-to-pay question that could be used in the <a href="/keyword/contingent-valuation/" >contingent valuation</a> study. Also write a willingness-to-accept question that could alternatively be used in the <a href="/keyword/contingent-valuation/" >contingent valuation</a> study. (I have added our April 22 sample WTP and WTA questions to the Lecture Materials part of the course Web site in case you need to look at them.) You may use a dichotomous choice, payment card, or open-ended question. c) With each of the three approaches in part a, which of the categories of values from your April 17 Total Economic Value slide could you estimate? d) For the travel cost method, wWhat is a difficulty, problematic issue, or shortcoming of the travel costat approach (other than the fact that it does not measure all categories of value)? 1 Based on a true story. (In other words, I made some of it up, but not all of it.) e) For the <a href="/keyword/contingent-valuation/" >contingent valuation</a> method, wWhat is a difficulty, problematic issue, or shortcoming of thate <a href="/keyword/contingent-valuation/" >contingent valuation</a> approach? f) Which method or combination of methods would you use? Justify your choice well. (There is not necessarily only one good answer to the question of which method(s) you would use. In the grading, your justifications will be important.) 2. Hedonic approach to measuring the price of proximity to a pollution source Using the hedonic price method, an economic analysis was conducted on the economic impact of living near a Superfund toxic site. This analysis sought to determine how much economic compensation (in the form of lower housing price) consumers require in order to choose to live close to the contaminated site. Suppose the econometric estimates from the study yielded the following model: PRICE = where PRICE = SQFT = BATH = DIST = 25 + 0.04*SQFT - 16.7*BATH + 5.67*DIST The sale price of the house, in thousands of dollars. The area of the house, in square feet. The number of bathrooms in the house. Distance from the Superfund site For each estimated coefficient in the equation for housing prices, comment on whether its sign makes sense. A short sentence or two for each variable should be sufficient. 3. Value of a statistical life2 a) Suppose the EPA hired you to do a hedonic wage study to determine the value of a statistical life. You collect data on many jobs, conduct <a href="/keyword/multiple-regression-analysis/" >multiple regression analysis</a> , and obtain the following results: WAGE = 3,469 + 9.45*HOURS + 0.27*EDU + 4,800*RISK where HOURS = Average hours worked per year EDU = Years of education required RISK = Percent chance of job-caused death, per year (so RISK can take values up to 100, where 0 would be no chance of job-caused death and 100 would be certain death from work. However, for most jobs, RISK is less than one in a thousand, i.e. less than 0.1.) Based on these results3, what is your estimate of the implicit value of a statistical life? 2 We will finish covering the material for this question on Tuesday, April 29. However, you may be able to do it in advance of class with what you already know, or you might find that trying primes your mind for what is to come on Tuesday. 3 For the purpose of this exercise, ignore the fact that the functional form used in the regression analysis may be too simple. b) In the United States, only three environmental statutes--the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA), the <a href="/keyword/toxic-substances/" >toxic substances</a> Control Act (TSCA), and the Safe Drinking Water Act (SDWA)--require that the benefits and costs of regulations be weighed in setting environmental exposure standards. In 1985, under the rules of the TSCA, the <a href="/keyword/environmental-protection-agency/" >environmental <a href="/keyword/protection-agency/" >protection agency</a> </a> proposed a ban on the use of asbestos in 39 products, ranging from brake linings in cars to roof coatings to <a href="/keyword/protective-clothing/" >protective clothing</a> . The EPA developed estimates of the number of fatal cancer cases that could be avoided for 31 of the 39 products considered for regulation. The EPA also estimated the cost of the ban by developing estimates of lost consumers and producers surplus from the use of the substitute products. Given estimates of the annual costs of the bans and the annual predicted number of fatal cancer cases avoided, dollar values per life saved could be calculated. A sampling of these values is shown below. Product Drum brake linings Pipeline wrap Roofing felt Clutch facings Asbestos packing Gross Total Loss ($ millions) 13.87 2.77 6.60 10.93 0.49 Deaths avoided 136.39 0.90 1.28 1.51 0.01 Cost Per Death Avoided ($ millions) 0.10 2.49 5.16 7.24 49.00 Based on (a) above, which of the products would you recommend be banned? Why? c) An analyst hired by the EPA claims that your sample in part (a) is less risk averse than the rest of the population. (In other words, that you surveyed people who are less bothered by risk than is typical.) If the analyst is correct, would the optimal level of regulation tend to be higher or lower than your answer in (b)? (I.e. should additional products potentially be banned, or fewer?)