Module 6 Valuing impacts from observed behavior

Question 1

What is a shadow price?

Answer 1

The estimation of what the price would be if the good or service were traded in a perfectly competitive market
Based on observed behavior
Revealed preferences

Question 2

What is a perfectly competitive market?

Answer 2

Goods are traded in a market
Demand curve => Marginal social benefit
Supply curve => marginal social cost
Equilibrium price and quantity are efficient and where MSB = MSC

Question 3

When does MSB != MSC?

Answer 3

Market failure
A market doesnt exist
Government intervention

Question 4

What are the shadow price estimation methods?

Answer 4

Simple
- Market analogy
- Trade-off [VSL]
- Intermediate good
- Asset valuation
Regression
- Hedonic pricing

Question 5

What is the market analogy method?

Answer 5

Using the equilibrium price and quantity of the privately provided good to deduce the true equilibrium price of the publicly provided good

Question 6

Market analogy best practices

Answer 6

Publicly and privately provided goods are similar
No excess demand or its known
The two goods represent two points on the same demand curve

Question 7

Total benefit

Answer 7

The max amount a consumer would be willign to pay for a certain number of units of a good
Graphically: the area under the demand curve up to the quantity purchased
Total benefit = consumer surplus + total consumer expenditure

Question 8

Consumer surplus

Answer 8

The net benefit a consumer gains from consuming a certain quantity of a good
The difference between the amount willing and actual amount spent
Graphically: the area under the demand curve and above the equilibrium price

Question 9

Given two p and q
FSU p1: 7000 Private p2: 35000
q1: 32000 q2: 10000
Estimate the demand curve
Find consumer surplus
Final total benefit created

Answer 9

Find the demand curve by using a system of equation
q = 37500 - 0.786p
CS = 1/2(32000)(47727-7000)= 651632000
Total benefit = CS +p1*Q1 = 651632000 + 244000000 = 875632000

Question 10

Trade-off approaches

Answer 10

• Value of time
• VSL
• Human capital
• Willlingness to pay

Question 11

Trade-off: value of time

Answer 11

People sell their leisure time for their wage
Value of time = hourly wage

Question 12

Trade-off: VSL

Answer 12

VSL is the local tradeoff rate between fatality risk and money
Serves as a measure of willingness to pay for risk reduction and the cost of enhancing safety
Provides policy guidance

Question 13

Value of a Statistical Life: Human Capital

Answer 13

Human capital approach: the value of a life is equal to the market values of the output produced by an individual during his or her expected lifetime
Think GDP!!!

Question 14

Value of a Statistical Life: PURE Human Capital

Answer 14

Using 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 approximately 50% of the wage

Question 15

Value of a statistical life: Willingness to pay

Answer 15

The value of a life is equal to the amount an individual is willing to pay to avoid death
VSL = WTP/Reduction in mortality risk

Question 16

VSL in practice

Answer 16

Human capital approach VSL< WTP VSL
Human capital approach commonly used to value time of identifies individuals

Question 17

Intermediate good formula

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Answer 17

Estimates the gross benefit of a project based on its value added to the downstream activity
Annual benefit = income with project - income without project

Question 18

Intermediate good applications

Answer 18

Valuing education and training programs, BUT education for example can have intrinsic consumption value (we love school)

Question 19

Asset valuation

Answer 19

Impacts of government projects are often capitalized into the market value of the assets
Observed increases (decreases) in asset values can be used to estimate the benefits (costs) of projects
* Land conservation efforts
* Changing airplane routes
* Road widening
* Highly rated school zone
Caveats: often assumes impacts are immediately and thoroughly capitalized

Question 20

Hedonic pricing

Answer 20

The value of the attribution is a coefficient estimated within the regression, NOT the dependent variable
COntrols for variables outside of the dependent variable and the independent variable of interest

Question 21

Hedonic Pricing VSL

Answer 21

Assumed all else equal, the value of life is equal to (pay 1 - pay 2)/(prob death 1 - prob death 2)
But in reality, the formula would just be VSL = Pay increase/probability of death