1. REVEALED PREFERENCE METHODS
MARKET ANALOGY METHOD
TRAVEL COST METHODS
DEFENSIVE EXPENDITURES METHOD
INTERMEDIATE GOOD METHOD
ASSET VALUATION METHOD
THE HEDONIC PRICE METHOD

2. Table 1: QUALY Costs Program Childhood immunizations <0
Prenatal care <0
Flu shots $1200
Water chlorination $8K
Pneumonia vaccination $24K
Breast cancer screening $34K

3. Table 1: QUALY Costs Program OSHA Construction safety rules $76K
EPA home radon standards $280K
EPA asbestos standards $3.8M
EPA radiation standards $54M
Source: (John D. Graham, et. al, 1994)

4. Regulatory Policies and Practices
Health and Safety
Environmental

5. Figure 1: TYPES OF REGULATION
In the mid 1970s, one of the fundamental rules of SS was violated
Govt regulation of business
In the US, Corps of Engineers’ projects -- dams, rivers and harbors projects -- have been subject to BCA for nearly seventy years and the Corps have gotten pretty good at BCA. Major federal regulatory initiatives have been subjected to BCA by executive order since the Ford administration. The main problem confronting most BCA analysts, most of the time, lies in estimating benefits. In the case of regulatory programs, cost estimates are also highly problematic. That is true both ex ante and ex post. Why?
Source: Thomas D. Hopkins (2006) AN ASSESSMENT OF CROSS-NATIONAL REGULATORY BURDEN COMPARISONS. Fordham Urban Law Journal (July: 9-48)

6. Figure 2: FEDERAL REGULATORY OUTLAYS
Hasn’t stopped growth but has changed direction -- substantial reduction in economic and anti-trust regulation (price fixing remains about the only per se violation of the S & C Acts remaining). Increase in env reg, reg to promote health and safety, and process regulation (accounting, tax, banking)
Source: file:///Work/Courses/ABC-04/pubfin/REGBUD~1.HTM

7. Figure 3: Costs of Major Rules (1981-2007)
BCA in this area is very difficult, spending is known (cost in federal BCA accounting) for tax supported govt programs, but benefits must be estimated. Where regulation is concerned, one must estimate both sides of the equation -- not always easy.
Source:

8. Figure 4: Benefits and Costs of Major Rules (1992-2007)
Source:

9. Costs and Benefits Requiring Valuation

10. Costs and Benefits Requiring Valuation

11. MARKET ANALOGY METHOD

12. MARKET ANALOGY METHOD Using Price of 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.

13. Example: Using Price of Analogous good
Note: distinction between
Comparable and substitutes
What if we don’t have info on demand schedules for comparables? One expedient is to assume that slope is -1, |e| = 1, at point observed. For example, shoppers could take subway but don’t. Say the inconvenience cost of taking subway is $30 and parking and travel cost are $25. Then gain per additional shopper from providing a convenient parking garage would be $2.50.

14. MARKET ANALOGY METHOD
Using the Market Analogy Method to Value Time Saved
The obvious analogous market for time saved is the labor market.But…
Wages ignore taxes and fringe benefits.
People could be working while traveling or waiting and, therefore, time saved would be worth less than the wage rate (plus benefits).
People value different types of time differently. Importantly, many people enjoy traveling.
Method assumes working hours are flexible – (ignores structural rigidities and failures).
Firms may not pay employees their marginal social product.

15. 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.

16. 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.

17. 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-the-job 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).
Indirectly estimating the “price” people are willing to pay to take (or accept) certain risks by observing behaviors in markets for goods that embody risks. The most common and widely accepted method for estimating the value of life is to examine wage premia for risky jobs.

18. Miller Value of Life Estimates
29 studies considered (originally estimated in 1985 dollars). They estimate value of life in four ways:
Wage premia for risky jobs.
Consumers’ WTP for a variety of safety features, such as safer cars, smoke detectors and life insurance.
Observation of individual behavior on such decisions as the use of pedestrian tunnels, seatbelts or speed choice.
Contingent Valuation (CV) methods to survey people about their willingness to invest in ways to increase safety and health.
The mean value of life = $3.02M (1999 U.S.$). with a standard deviation of 0.77.
The evidence also suggested that individuals value life similarly whether the risk is voluntary or involuntary or whether the death is painful and slow or quick.

19. Fisher, Chestnut, and Violette Survey of Value of Life Estimates
21 studies (originally estimated in 1986 dollars). 1) Early low-range wage-risk estimates.
Early high-range wage-risk estimates.
New wage-risk estimates.
New contingent valuation studies.
Consumer market studies.
They conclude that the most defensible estimates suggest the reasonable range for the value per-statistical-life is $2.43M to $12.92M (1999 U.S.$), but they place more confidence in the lower end of the range.

20. Viscusi Survey of Value of Life Estimates
3 sets of studies (originally reported in 1990 dollars:
21 wage premia for risky jobs studies. The majority of these studies find value of life estimates in the $3.82M to $8.92M range (in 1999 U.S.$).
7 other revealed preference approach studies. These studies provide widely varying estimates between $0.09M and $5.10M (in 1999 U.S.$).
6 contingent valuation surveys. These also provide a wide range of estimates – from $0.13M to $19.1M (in 1999 U.S.$).
A plausible range for the value of a statistical life is between $2.5M and $4.0M in 1999 U.S.$.

21. TRAVEL
COST METHODS

22. Value of Time
Time spent on any activity that individuals would pay to avoid is a cost. In CBA the most important time cost is travel time. This travel time cost is called the “Value of Travel Time Savings” (VTTS). VTTS is usually expressed as a percentage of the after-tax wage-rate.
Note: VTTS estimates may only provide a rough guide to other time costs. For example, people typically experience considerably greater disutility from waiting time than from "pure" travel time.

23. Value of Travel Time Savings

24. 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.

25. 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.

26. TRAVEL COST METHODS q = f(p,ps,Y,Z)
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)

27. Zonal Travel Cost Method
This method allows one to estimate the market demand curve for access to a non-unique site, which is shown in the next slide.
The consumer surplus may be obtained from the market demand curve in the usual way.

28. TCM Demand Schedule

29. TRAVEL COST METHODS
Estimating the demand schedule for a non unique site is quite straightforward.
select a random sample of households within the market area of the site.
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.
specify a functional form for the demand schedule and estimate it using the survey data.

30. Zonal Travel Cost Method
One can also use TCM to estimate demand for a unique site. To us this method
survey actual visitors rather than potential ones
allocate visitors to a particular zone, depending on their “travel costs” (usually distance).
For each zone, compute the average number of visits per year and the average total travel cost.
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

31. Estimating Consumer Surplus
By repeating this calculation for each zone, it is possible to calculate the total consumer surplus.

32. Estimating Consumer Surplus: Benefits of a recreation area
5,000 Visitors
3,000 Visitors
5,000 Visitors
Wilderness Area
Miles
100
300
500
10,000 Pop
ZONE A
20,000 Pop
ZONE B
100,000 Pop
ZONE C

33. Estimating Consumer Surplus: Benefits of a recreation area
ZONE A: .5 (10K) * (60-10) or .5 (10K) * [(110-10)/2] =$250K
ZONE B: .15 (20K) * (95-80) or .15 (20K) * [(110-80)/2] =$45K
ZONE C: .05 (100K) * ( ) or .05 (100K) * [( )/2] =$25K
SUM = $320K

34. Limitations of the TCM
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).

35. Limitations of the TCM
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).

36. 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.

37. DEFENSIVE EXPENDITURES METHOD

38. 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.

39. DEFENSIVE EXPENDITURES METHOD

40. Problems with this Method
Reduced spending on a defensive expenditure underestimates the benefits of cleaner air.
It assumes people adjust quickly to the new equilibrium, such as new smog levels.
Defensive expenditure may not remedy entire the damage.
Defensive expenditures may have benefits other than remedying damage, which should be included.
Not all defensive expenditures are purchased in markets, for example, some people clean their own windows; changes in these “expenditures” should also be included.

41. INTERMEDIATE
GOOD METHOD

42. 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.

43. Asset Valuation Method

44. 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.

45. THE HEDONIC PRICE METHOD

46. 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.

47. Estimating the value of a scenic view
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:
In a well-functioning market, the hedonic price can naturally be interpreted as the additional cost of purchasing a lot that is marginally better in terms of a particular attribute.
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.

48. Estimating the value of a scenic view
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:
In a well-functioning market, the hedonic price can naturally be interpreted as the additional cost of purchasing a lot that is marginally better in terms of a particular attribute.

49. Estimating the value of a scenic viewç.

50. 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 = b(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).
In a well-functioning market, the hedonic price can naturally be interpreted as the additional cost of purchasing a lot that is marginally better in terms of a particular attribute.

51. Estimating the value of a scenic view
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.
In a well-functioning market, the hedonic price can naturally be interpreted as the additional cost of purchasing a lot that is marginally better in terms of a particular attribute.

52. Estimating the value of a scenic view

53. Adjusting Plug Values

54. Adjusting Plug-in Values
Time (nominal price adjustment)
Income and Socioeconomic Factors
Physical Characteristics
Project Differences
Technology, population changes, etc.

55. Converting Earlier Figures to Current Dollars
In order to make comparisons across time periods, we must use current dollars.
This can be done by “inflating” the earlier data for the increase in the price level.
The formula for converting the figures for the earlier year into current dollars is:
Figurecurrent $ =
price indexcurrent year
price indexearlier year
Figureearlier $ *
If prices have risen, this will “inflate” the data for earlier years and bring it into line with the current purchasing power of the dollar.