spring Econ435 2006 Assignment 10 Nonmarket valuation
Suggested Answers
We will grade this in class, together, on Monday April 17. If you don't come to class for some valid reason, I will grade it when I can. Answers will be available on the Web. 1. (1 pt) In a Wall Street Journal article (you might find it interesting: "Furry Math Market Fails To Capture Nature's Value"), the opening paragraph says: "If you belong to the new discipline of ecological economics, to determine the worth of a wetland you might calculate what it would cost to construct levees and other structures to provide the flood control and storm protection that natural wetlands do. From that, you'd extrapolate that the world's wetlands are valued at $4.9 trillion -- the cost of replacing "nature's service" with technology. This is an example of using which method to place a value on wetlands: A. Hedonic pricing B. Replacement cost C. Travel cost D. Contingent valuation 2. (1 pt) The big advantage of travel cost method as compared to contingent valuation is: A. It is cheaper to conduct the research B. It is much easier to understand conceptually C. It is based on actual behavior rather than people just saying what the would do D. The NOAA panel approved travel cost but not contingent valuation 3. (1 pt) If I ask you what you are willing to accept in compensation if polar bears go extinct and you say "$20 million", this is probably an example of: A. a protest response B. a hypothetical response C. Information set bias D. Self-selection 4. (2 pts) Duffield talked about a "hedonic method" for valuing lost subsistence opportunities as a result of the Exxon Valdez oil spill. Here is a hypothetical example. Fill in the blanks. There are 100 identical persons. If they work in the cash economy, they can each earn [2000 hours x 20 $/hr] = ____$40,000_____________ $/year.(call this number d) If they work as subsistence harvesters, they can each harvest 20 pounds per day during 100 days of hunting or fishing season = ___2,000_____________ pounds/year. (call this number p) Since they choose to pursue subsistence, the value to them of a year of subsistence activity must exceed the value of a year's worth of cash. This means that the value of __2,000___ pounds (same number as p above) exceeds the value of _40,000__ $ (same number as d above).
Therefore the value of subsistence activity must exceed 40000/2000 = 20$ per pound. Note: this is called a hedonic method because the person chooses a bundle of goods and utility from subsistence rather than a bundle of cash and utility from wage labor. 5. (1 pt) What did Judge Holland (refered to in the article as "the court") end up saying about the validity of this hedonic approach. Summarize briefly, please do not recapitulate a long quote. He said that lifestyle benefits are "non-economic" and cannot be considered under maritime nuisance law, which was the law that governed the EVOS damage claims. 6. (4 pts) This problem will be on the final! Make a good-faith effort now and you will probably get full credit for this assignment. You may wish to use the spreadsheet assignment10_problem_econ435_s06.xls to help organize you your answers. If so, you can just submit the spreadsheet printout. An answers version is assignment10_answers_econ435_s06.xls In the EVOS CV study of lost passive value, The State of Alaska's economic consultants used a 2-part dichotomous choice approach with 4 possible starting points to which respondents were randomly assigned. Here is the actual raw data they got. I adjusted it so that the total sample here is 400 people.
5.1) Fill in the three blank boxes above to show that you understand how the number of responses relates to the pattern of questioning. (reminder: the first line shows that 22 people said "yes" to a spill-prevention program that would cost their household $10 but "no" to the same program if it would cost their household $30)(also notice how 22+45=67). 5.2) Now me must deal with the low and high ends of the intervals. Let us choose a "conservative" approach, meaning, when in doubt we will assign estimates in a way that tends to decrease the estimated WTP amounts. This approach allows us to say "the WTP is at least such-and-such. This is a common technique when you are working with lots of uncertain numbers. You decide in advance whether you want to end up with a lower bound estimate or an upper bound estimate. In this case we are going for a lower bound estimate. To deal with the intervals such as "30 or higher", meaning they said yes to 10 and yes to 30, let us assign the next highest number from the mix and assume that they would have said "no" to that number. So, we replace the interval "from 30 to higher" with "from 30 to 60" and "from 60 to higher" with "60 to 120". Etc. We have to leave "from 250 to higher" as is. To deal with the low end, notice that we have data for intervals such as "0 to 10" and "0 to 30". These intervals overlap others, c...