2008_04_24_Notes

2008_04_24_Notes - UP FRONT Reading for Tuesday Arrow et al...

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Unformatted text preview: UP FRONT, 4-24-08 Reading for Tuesday, Arrow et al., “Is there a role for benefit-cost analysis in environmental, health, and safety regulation?” (Handout and on Website.) Look for problem set by email. Due a week from today, Thursday, April 24. Outline for Today 1) Hedonic valuation WTA is often larger than WTP (Horowitz, J.K. and K.E. McConnell, 2002. JEEM , 44:426-447.) Your WTA/WTP Ratios Private good (Diet Coke): Public good (Eliminating Cornell’s CO 2 emissions): Endowment effect was one reason WTA could be greater than WTP. Mugs. But for goods without good substitutes, such as some environmental goods, there is another potential reason as well… “Willingness to Pay and Willingness to Accept: How Much Can the Differ?” (W. M. Hanemann, 1991. AER , 81(3):635-647) Perfect Substitutes y WTA WTP U 1 U y Q o Q 1 An additional reason WTA can be greater than WTP, for goods without good substitutes, such as some environmental goods (W. M. Hanemann, 1991. AER , 81(3):635-647) • Examples • There will be a large divergence between WTP and WTA if other goods y substitute poorly for the environmental good Q Imperfect Substitutes Result: WTP < WTA Q o Q 1 1 U U y WTP WTA What is hedonic valuation? One can think of something like a house or a job as a "bundle" of attributes. For example, a house is a bundle of attributes that include rooms, proximity to jobs, and ambient air quality. A job is a bundle of attributes that include time commitment, skills required, and occupational death risk. The bundles vary: for example, some house locations have better air quality than others. The hedonic method of valuation involves inferring the value placed on these individual attributes based on the observed variation in the attributes and prices of the bundles.and prices of the bundles....
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2008_04_24_Notes - UP FRONT Reading for Tuesday Arrow et al...

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