10. Valuing Impacts from Observed Behavior: Indirect Methods Reading: BGVW, Chapter 14

1. Market Analogies Find private markets that provide same goods as a public project, use private market as a guide Examples Education public housing, home care sale price understates private price overstates pool example

How similar are the two pools? Facilities, hours, crowding, populations, substitutes, and so on. Populations?

2. Trade-Off Method Extension of Market Analogy Method, where people can be observed make trade over good of interest Examples Value of Time 4

Value of time and labor mkt. Why does the theory say it makes sense? Benefits (U) Taxes (O) Working while traveling (O) Consumption value of travel (O) Hours not flexible (U/O) Retirees/Students (U) Distortions Labor supply curve is the opportunity cost of time wage Different types of travel

Value of Risk Reduction Consider Air Bag Purchase Example Air Bag Cost = $300 Risk Reduction = 1/10,000 Over a population of 10,000 people each person willing to pay $300, 1 life will be lost. So, $300x10,000 = $3 million is the Value of a Statistical Life (VSL) VSL = $A/w ( = $300/(1/10,000)) $A = the willingness to pay for risk reduction w = the risk reduction. Consider Job Market Example Higher Wage paid for taking on more risk Added Wage = $A (“wtp for safer job”) Risk Reduction = w 6

Comment: Identified vs. Observed Lives Issues with VSL in consumer purchase & wage studies Full information Identification (risky preferences) Aggregation Small number sensitivity Baseline risk and DMU of risk reduction Control for other unobservables (see hedonics) Forgone earnings is wrong approach for valuing life! 7

3. Intermediate Goods Method Value added by downstream activity Examples Irrigation Education Issues with all “Simple” Methods Omitted Variables Self Selection

4. Hedonic Price Method Intermediate Goods Used to value ‘housing attributes’ in property value models and ‘job attributes’ in wage models Regression analysis Hedonic Price Function

Using data on housing transactions one then estimates an hedonic price function Example of data Obs P Dist CBD House size Age Closest Park 1 183,000 4 2800 17 2 356,000 5.1 3000 .5 3 725,000 .3 1983 54 3.7 . N 64,500 7.2 2100 66 11

BGVW example, log-linear hedonic Regress p  cbd, size, etc. BGVW example, log-linear hedonic Implicit value of view Other attributes: crime, pollution, etc. Increasing at a decreasing rate

Wage Hedonic to value risk reduction (VSL again) Many wage hedonic studies

Issues with hedonics Full information Incomplete values No existence value Multicollinearity Measurement Lumpiness Disequilibrium Identification

4. Travel Cost Method Used to value recreation sites and attributes of recreation sites (eg., water quality) Treats travel cost to site as an individual’s ‘price’ of reaching a site and along with data on trips by distance estimates a demand curve for recreation

Consider the following relationship, distance to site and number of trips a person takes

Trip Cost Number of Trips

4. Defensive Expenditures (Cost Avoidance) Examples Air Pollution  Window Clean Water Contamination  Bottle Water etc. Pollution  Health Care Cost Issues May not remedy all damages Missing effects Speed of adjustment