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Measuring Environmental Benefits: Revealed Preference Approaches Travel Cost and Hedonic Methods

Motivation: Generic Group Projects Yosemite National Park needs to raise $10 million for bus system in park through increase in entrance fee. What should be the fee increase to pay for this? Examine cutting back flights at SBA because of noise in surrounding area. Is noise a problem that justifies this? How much does noise depress property values?

Revealed preference approaches (two most common) Travel Cost Model: use data from actual visitations, estimate cost of travel, derive demand curve for visits to the “site”. Hedonic Price Method: compare products with similar attributes but one “bundles” an environmental good, derive demand for the environmental good. House prices influenced by environmental amenity (e.g. noise) Wages influenced by riskiness of job

1. Travel Cost Model: Yosemite Need to know the demand for park visits (note: this reflects use value only) Current entrance fee=$20. (Is this related in any way to the park’s value? How?) Goal: empirically develop demand curve for visits Typical visitor L = # hours worked by person at wage w. P 0 = out-of-pocket expenses to visit Yosemite, F = entrance fee. t = travel time, s = visit time

Effective price of trip Price of a trip:  [P 0 +w(t+s) + F] Notice opportunity cost of time (w) This assumes we value travel time and visitation time at the wage rate of the individual. Value of time ranges, but is often estimated at 1/3 or 1/2 the wage rate.

Objective Want to derive a demand curve for visits to Yosemite. What can we do with a demand curve? Calculate consumer surplus (benefits) – review concept on board… Can calculate use-value of Yosemite Can determine cost to consumers from e.g. entrance fee (from F 0 to F 1 )

Demand for visits to Yosemite F0F0 F1F1 V1V1 $ Demand OLD Consumer Surplus NEW Consumer Surplus V0V0 Visits

Procedure [1 of 3] 1. Station students at park entrance on several “random” days. Ask visitors (1) zip code, (2) other stuff (mode of travel, $ spent, socioeconomic characteristics…) Scale up answers to entire year, over entire pop: # visits/zip code/year to park Use knowledge of total number of visits to park per yr 2. Calculate travel cost from each zip code Use travel time, travel costs, wages in zip code This, with the entrance fee, is the “price” of a visit:  = TC +F 3. Sort zip codes into “zones” of equal travel cost E.g. Sacramento, Santa Barbara, Germany, …, etc.

Travel cost “zones” Z=1 Z=2 Z=3 Z=4 Yosemite Zones have equal travel cost within each zone.

Procedure [2 of 3] 4. For each zone, Calculate population (P z ) of zone Estimate number of visits (S z ) from zone Calculate visitation rate: v z = S z /P z. 5. Estimate relationship between price and visitation rate v = f(π,y) = f(TC+F,y) Plot price (  z ) vs. visitation rate (v z ) – scatter plot Perform multiple regression to control for other variables (y) vzvz Price, π z f

Procedure (Step 3 of 3) 6. Vary F from 0 to some upper bound; for each F: Calculate visits for each zone, using v=f(TC+F,y) and characteristics of zone Add up over all the zones to obtain total visits to the park for each F 7. Voila: Demand curve! Visits as a function of entrance fee, F

Demand curve Entrance Fee, F Number of visits, V Demand for visits to Yosemite

Finish your analysis Use demand curve to advise head Smokey Calculate revenue from different park entrance fees

2. Hedonic pricing to value risks Do you trade off risks to your life with money?

2. Hedonic pricing to value risks Do you trade off risks to your life with money? Observe: workers willing to undertake risk for increased pay Observes wage-risk tradeoffs in labor market Hedonics: Compare different occupations with different risks of mortality Assumes workers are aware of risks and that they are perfectly internalized. Assumes only real difference between occupations is level or risk.

Occupations similar except risks OccupationWage (hourly) Risk of Death (statistically) Backhoe operator$ Bulldozer$ Grader operator$ Lawnmower$

VSL: Willingness to pay for marginal reduction in risk to life (VSL) Wage Prob death (  … 1.0 Calculate W(  ). dW/d  = VSL (Value of Statistical Life) Wrong interpretation: change in wage when risk changes from  = 0 to π = 1.0. VSL VSL typically $3-$6 million From wage-risk studies

VSL Studies (1990 US$) Australia (1984): $3.3 million Japan (1986): $7.6 million US (1982): $16.2 million Canada (1979): $3.6 million UK (1977): $2.8 million US (1976): $6.5 million Caution: ignores age & health

Hedonic Price Analysis Estimate marginal effect of noise of house prices Control for other characteristics using multiple regression Compute price effects of reduced noise at airport Approximation of willingness-to-pay for noise reduction

Hedonic Analysis of Property Values x x x x x x x x x x x x Hedonic Price Function Noise Level House Prices

Conclusions Revealed preference methods desirable for valuing environmental benefits Relies on “fortuitous” association of markets with environmental goods – not that common Two basic methods Travel cost (household production) Hedonic (typically housing or wage-risk studies) Next: “Stated” preference approaches