ABC13 - OTHER REVEALED PREFERENCE METHODS MARKET ANALOGY...

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Unformatted text preview: OTHER REVEALED PREFERENCE METHODS MARKET ANALOGY METHOD INTERMEDIATE GOOD METHOD ASSET VALUATION METHOD THE HEDONIC PRICE METHOD TRAVEL COST METHODS DEFENSIVE EXPENDITURES METHOD MARKET ANALOGY METHOD Using Only Price or Market Expenditures of an Analogous Good – The market price of a comparable good in the private sector – Problematic when beneficiaries don’t pay market prices Using Price and Quantity of an Analogous Private-Sector Good to Estimate the Demand Curve for a Publicly Provided Good – Use private-sector data to map the demand curve for a publicly-provide good if the goods and their markets are similar. – Using expenditures alone ignores consumer surplus. Example: Using Price of Analogous good MARKET ANALOGY METHOD Using the Market Analogy Method to Value Time Saved – The obvious analogous market for time saved is the labor market.But… 1) Wages ignore taxes and fringe benefits. 2) People could be working while traveling or waiting and, therefore, time saved would be worth less than the wage rate (plus benefits). 3) People value different types of time differently. Importantly, many people enjoy traveling. 4) Method assumes working hours are flexible – (ignores structural rigidities and failures). 5) Firms may not pay employees their marginal social product. Using the Market Analogy Method to Value a Life Saved Forgone earnings method. Value of a life saved = discounted future earnings. Higher values for young, high-income males than old, low-income females. – ignores consumer surplus – WTP for a small reduction in risk of death Consumer purchase studies. How much people pay for life-saving devices, such as safety belts. Consumer Purchase Method If people are willing to pay an extra $220 to reduce the probability that they will die by 1/10,000, then they value life at $2.2 million. Using the Market Analogy Method to Value a Life Saved • Labor market studies. If a person is willing to forgo an extra $2,000/yr to increase the probability that he will not have a fatal on-thejob accident by 1/1,000, then he values his life at $2 million (or more). This method assumes labor markets are efficient and no self selection bias (some people may like to take risks which would lead to a relatively small gap in the salary between risky and less-risky jobs). INTERMEDIATE GOOD METHOD If a project produces an intermediate good that is not sold in a well functioning market (e.g., improvements in human capital), then its value can be imputed by determining the value added to the “downstream activity”: Annual Benefit = NI(with project) – NI(w/o project) where, NI = net income of downstream business. The total benefit of a project can be computed by discounting these annual benefits over the project’s life. ASSET VALUATION METHOD The impacts of a project or policy can be imputed from changes in the price for certain capital goods. For example, the “value” of noise can be inferred from comparing the price of a house in a noisy neighborhood to the price of a similar house in a quiet neighborhood. An advantage of using prices is that information is quite quickly and efficiently capitalized into prices so that price changes or price differences provide a good estimate of the value of the policy change. THE HEDONIC PRICE METHOD The hedonic price method can be used to value an attribute, or a change in an attribute, whenever its value is capitalized into the price of an asset, such as houses or salaries. It consists of two steps. Suppose one wants to estimate the value of a scenic view. THE HEDONIC PRICE METHOD The first step estimates the effect of a marginally better scenic view on the value (price) of lots (a slope parameter in a regression model), while controlling for other variables that affect lot prices. For example, we may postulate the following multiplicative model: P = b 0 CBDb 1 SIZEb 2 VIEW b 3 NBHDb 4 ee This equation is called a hedonic price function or implicit price function. The change in the price of a lot that results from a unit change in a particular attribute (i.e., the slope) is called the hedonic price, implicit price, or rent differential of the attribute. THE HEDONIC PRICE METHOD For example, the hedonic price of scenic views, which we denote as rv, measures the additional cost of buying a lot with a slightly better (higher-level) scenic view. For the above multiplicative model: rv P = b3 >0 VIEW Lot/house Price THE HEDONIC PRICE METHOD The second step estimates the WTP for scenic views, after controlling for “tastes,” which are proxied by income and other socioeconomic factors. To account for different incomes and tastes, analysts should estimate the following WTP function (inverse demand curve) for scenic views: rv = β (VIEW, Y, Z), where rv is from step 1, Y is household income, and Z is a vector of household characteristics that reflects tastes (e.g., socioeconomic background, race, age, and family size). THE HEDONIC PRICE METHOD It is straightforward to use the equation in the previous slide to calculate the change in consumer surplus to a household due to a change in the level of scenic view. These changes in individual household consumer surplus can be aggregated across all households to obtain the total change in consumer surplus. TRAVEL COST METHODS The clever insight of the TCM is that, although admission fees are usually the same for all persons (indeed, they are often zero), the total cost faced by each person varies because of differences in the travel cost component. Consequently, usage also varies, thereby allowing researchers to make inferences about the demand curve for the site. TRAVEL COST METHODS The full price paid by persons for a visit to a site is more than just the admission fee. It also includes the costs of traveling to and from the site. Among these travel costs are the opportunity cost of time spent traveling, the operating cost of vehicles used to travel, the cost of accommodations for overnight stays while traveling or visiting, and parking fees at the site. The sum of all of these costs gives the total cost of a visit to the site. TRAVEL COST METHODS To estimate demand for access to a particular site, we expect that the quantity of visits demanded by an individual, q, depends on its total cost, p; the cost of substitutes, ps; the person’s income, Y; and variables that reflect the person’s tastes, Z: q = f(p,ps,Y,Z) TRAVEL COST METHODS Estimating the demand schedule for a particular site with the TCM is straightforward. 1. select a random sample of households within the market area of the site. 2. survey these households to determine their numbers of visits to the site over some period of time, all of their costs involved in visiting the site, their costs of visiting substitute sites, their incomes, and other characteristics that may affect their demand. 3. specify a functional form for the demand schedule and estimate it using the survey data. Zonal Travel Cost Method To us this method 1. survey actual visitors rather than potential ones 2. allocate visitors to a particular zone, depending on their “travel costs” (usually distance). 3. For each zone, compute the average number of visits per year and the average total travel cost. 4. Estimate the relationship between cost/trip and the number of trips per person. The consumer surplus for a visitor from a particular zone is given by the area below this curve and above the cost of a visit from that zone Estimating Consumer Surplus By repeating this calculation for each zone, it is possible to calculate the total consumer surplus. Zonal Travel Cost Method • It is also possible to estimate the market demand curve, which is shown in the next slide. • The consumer surplus may be obtained from the market demand curve in the usual way. Estimating Demand Schedule Limitations of the TCM 1. 2. It is restricted to sites where people (in the zones) have different travel costs. Without variation in total cost, it’s hard to estimate a demand curve There may be analytical problems in measuring the price of a visit. How does one measure opportunity cost of travel time? Does one include the marginal cost of capital goods used at the site? Should multiple purpose trips be included in the data (desirable if costs can be accurately apportioned to the site)? Also, the journey may have value (and hence the trip has multiple purposes). Limitations of the TCM 1. Travel cost may be endogenous not exogenous. People who plan to travel to the site frequently may choose to live near the site (hence number of visits and travel costs are determined simultaneously). OLS estimators could be biased. There may be other econometric problems, such as truncation (drawing sample from only visitors rather than the population at large – resulting in biased results). Also, there may be omitted variables (if tastes or substitutes vary across zones). 2. Limitations of the TCM 5. The method estimates the WTP for the entire site rather than features of the site. It’s possible to value features if people in zones can choose among alternative sites with different attributes – by using the “hedonic travel cost method,” which treats total cost as a function of both distance from zone to the site and the various attributes of the site. DEFENSIVE EXPENDITURES METHOD A defensive expenditure is an expenditure in response to something undesirable, such as pollution. If smog improves (worsens) you may spend less (more) on having your windows cleaned. The change in expenditures can be used as a measure of the change in pollution. Problems with this Method 1. Reduced spending on a defensive expenditure underestimates the benefits of cleaner air. 2. It assumes people adjust quickly to the new equilibrium, such as new smog levels. 3. Defensive expenditure may not remedy entire the damage. 4. Defensive expenditures may have benefits other than remedying damage, which should be included. 5. Not all defensive expenditures are purchased in markets, for example, some people clean their own windows; changes in these “expenditures” should also be included. ...
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ABC13 - OTHER REVEALED PREFERENCE METHODS MARKET ANALOGY...

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