Module 6: Valuing Impacts from Observed Behavior: Indirect Market Methods Flashcards
What are the qualities of a perfectly competitive market?
- Demand curves measure marginal social benefit
- Supply curves measure marginal social cost
- EQ when price and quantity are efficient
- EQ price is where MSB = MSC
When do we need to use a shadow price?
When no q or p observed or when the price != MSB = MSC
(occurs with market failures, market does not exist, or government intervention)
Define shadow price.
An estimate of what the price would be if the good/service were traded in a perfectly competitive market.
Based on observed behavior and revealed preferences
What are the shadow price estimation methods?
- Market analogy
- Trade off (time saved and value of a statistical life)
- Intermediate good
- Asset Valuation
- Hedonic pricing
What is the market analogy?
When you use the EQ price and quantity of a private good to deduce the true EQ price of he publically provided good.
Used when there is a good provided publically and privately (at comparible qualities), there is no excess demand, and the public price is lower than the market price.
Key assumption: the goods represent two points on the same demand curve
What is the formula for consumer surplus?
0.5(base)(height)
aka area of a triangle
Graphically, the area under the demand curve up to the quantiy purchased
What is the formula for total benefit?
Total benefit = CS + Total consumer expenditure
Define consumer surplus.
The net benefit a consumer gains from consuming a ceratin quantity of a good.
The difference between the amount willing to pay and the amount they actually pay.
Imagine a local government project that provides housing for 50 families and chargers a nominal rate of $200 per month. Suppose comparible units in the private sector charge $500 per month. What is the estimated total monthly benefits of the publically provided houses.
$25000
public quantity* private price = (50)(500)
T/F: Using the market analogy method, we assume the public and privately provided good are on the same demand curve.
True
Define trade-off: value of time.
- wage vs. leisure time
- Can be lost productivity at work, reduced commute time, and time saved on the job
What are the caveats of the trade-off: value of time?
Does not include benefits, taxes, or lack of flexibility in hours.
Define the trade off of the value of a statistical life.
The local tradeoff rate between fatality risk and money.
Serves as a measure of willingness to pay for risk reduction
T/F: The value of a statistical life is meant to be applied to the value of saving the life of an identified person.
False: meant for unidentified.
What is the human capital approach to the value of a statistical life?
The value of a life is equal to the market value of the output produced by an individual during his/her expected life.
What is the pure human capital approach?
- The value of a year is worth the annual salary
- The value of an hour is worth the hourly wage
- Leisure time is often valued at approx. 50% of the wage.
Define the willingness to pay approach for the value of a statistical life.
The value of life is equal to the amount an individual is willing to pay to avoid death.
VSL = willingness to pay/ reduction in mortatlity risk
Example: Willingness to Pay
Supppose a new food safety regulation reduces the annual risk of dying of foodborne illness by 0.00001. In a population of 100,000, the regulation is expected, in a statistical sense, to result in 1 fewer death from foodborne illness each year. If each person in that population is willing to pay $20 a year for the reduction in mortality risks, what is the total willingness to pay? The value of a statistical life?
1)WTP:(100,000)($2) =$2 million
2)VSL: $20/0.00001 = $2 million
In this case, the VSL is the same as the willingness to pay.
T/F: VSLs calculated via the human capital approach are less than via the willingness to pay approach
True
T/F: The human capital approach is commonly used to value time (on the job or leisure) of identified individuals.
True
Define the intermediate good approach.
Estimates the gross benefit of a project based on its value added to the downstream activity
Annual Benefit = Income(with project) - Income(without project)
Then discount annual benefits over time.
What are the caveats to the intermediate good approach?
- Education can have intrinsic consumption value
- Often, educ/trained programs served as signals of some already held unobservable
Define the asset valuation approach.
Observed increases(decreases) in asset values can be used to estimate the benefits(costs) of projects
What are the caveats to the asset valuation?
Often assumes impacts are immediately and thoroughly capitalized
Define the hedonic pricing approach.
Use a regression to value an aribute when it is capitalized into the price of an asset such as houses or salary.
T/F: The value of the attribute is a coefficient estimated within the regression, not the dependent variable.
True
Define a generic hedonic pricing model.
Ex. y = x1 + x2 + u
ln(wage/price) = B0 + B1fatality_risk + B2injury_risk + B3experience + B4educ + Bnx
aka: ln(wage/price) + B0 +B1risk + B2other_variables
