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1423class18 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± Class 18: Valuing non-market goods 1
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Outline • Non-market goods • Willingness to pay vs alternative measures • Household production analysis - smoke detectors • Wage market analysis • Contingent valuation - LA pollution • Links to regulation 2
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The Issue We need to value non-market goods in cost benefit analyses. Why? • Sources of value: – Accident risk e.g. nuclear facility – Amenity value e.g. public park – Option value e.g. biodiversity – Existence value e.g. Blue Whale 3
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EPA and OSHA Agencies should determine what value environmental amenities have. These non-market valuations should be incorporated into cost-benefit analyses of policies. The problem is how do we value something that does not have a market price. Distinguish use value and non-use value (which is which in previous list?). EPA and OSHA are explicitly not allowed to do cost benefit analyses. Why? What restrains their activities in the absence of CBA? 4
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Willingness to Pay Approach Willingness to pay approach is the one that should be used in valuing non-market goods. Why is this consistent with consumer theory? • Alternative approaches exist: – Human capital approach – Direct cost approach What differences in the value of life would we see between using the WTP, Human Capital and Direct Cost approaches? 5
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Approaches to Estimation of WTP • Revealed Preference approaches: – Household Production Analysis e.g. purchases of equipment such as smoke detectors – Hedonics e.g. effect on house prices, wages • Stated Preferences: – Contingent valuation analysis e.g. via survey of WTP for risk reductions • Experimental analysis – Hybrid of Revealed Preference and Contingent 6 valuation e.g. ask WTP for smoke detector
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Household Production Function Look at quantity demanded of market goods that are compliments or substitutes to or directly produce the intangible in order to infer the demand for the intangible.
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This note was uploaded on 11/18/2011 for the course ECON 14.23 taught by Professor Daronacemoglu during the Fall '09 term at MIT.

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1423class18 - 14.23 Government Regulation of Industry Class...

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