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

2. 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

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

4. 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

5. 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

6. 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

7. 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

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

9. 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

10. 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

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

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

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

15. 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

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

17. Trip Cost
Number of Trips

18. 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