valuation 2 - low priority

Question 1

The Travel Cost Method

Answer 1

 The travel-cost method measures the amount of money that people expend to use the resource (parks, rivers, or beaches)
 By relating differences in travel cost to differences in consumption, a demand curve for the resource can be derived and consumer surplus estimated

Question 1

Travel-Cost Example

Answer 1

 The value of Florida Beaches (Bell and Leeworthy)
 Survey 826 tourists: days spent at the beach and expenses incurred to use the beach, meals, travel and access fees, initial travel costs in and out of the state, length of stay, age, income, and other control data.
 Hypothesis: holding all the other factors constant, lower beach expenses –> greater number of days at the beach.
 Results: a 10% increase in “price” lead to a 1.5% decrease in time on the beach. Average CS per day of $38. Over 2 million tourists: $2.37 billion per year.

Question 2

Problems With the Travel Cost Method

Answer 2

 Estimation of the Demand Curve is difficult…
 People have different opportunity costs (not
controlled for in the estimation method)
 Some may have alternative recreational opportunities that others do not – e.g. estimated curve would shift if remote users had alternatives.

Question 3

Measuring Benefits: Hedonic Regression

Answer 3

 Hedonic regression uses the change in price from related (complementary) goods to infer a WTP for a healthier environment
 Confusing label! Hedonic=“pertaining to pleasure”
 A hedonic regression estimates the pleasure or utility associated with an improved environment

Question 4

Hedonic Regression Example 1: Property Values and Pollution

Answer 4

 PCB contamination in New Bedford (Mendehslon et al)
 Compare change in prices for houses sold before and after contamination became public. Control for all other factors affecting home costs.
 Houses closest to the contaminated area: price declines of $9,000; in area of secondary pollution, declines of $7,000. Total damages to home-owners: $36 million

Question 5

Hedonic Regression Example 2: The Value of Human Life

Answer 5

 The most ethically charged aspect of benefit-cost analysis is its requirement that we put a monetary value on human life
 Old approach, still used in court settlements: lifetime earnings. Retired or disabled person is “worth” $0.
 Economic Approach: “wage-risk studies.”

 Isolate the wage premium people are paid to accept risk jobs–police officer, firefighter, coal miner
 With this it is possible to estimate a WTA a reduction in the risk of death, and implicitly, the value of life
 Holding all else equal, suppose we observe that police officers receive extra pay of $700/yr. If the excess risk of death is 1/10,000 per year then collectively, 10,000 officers trade one of their lives each year for $700*10,000=$7 million.

Question 6

Problems with Hedonic Regression Example 2: The Value of Human Life

Answer 6

1. Accurate information
    Individuals might underestimate or overestimate risk of death
2. Sample selection bias
    People accepting risky jobs are not likely representative of the “average” person with preference toward risk-aversion
3. Involuntary nature of risk
    People may require more to accept risk imposed upon them without their consent

Question 7

The Value of a Life

Answer 7

 The value obtained from a hedonic regression is not the value of a specific life
 We would pay just about anything to save our own life or that of a loved one!
 Instead, this is the amount of money the average individual in a society requires to accept a higher risk of death

Question 8

Value of life - Morally OK?

Answer 8

 As with any measure of consumer surplus, this method will put a much larger value on life for folks from rich than from poor countries.
 USA: $7 million
 Pakistan: $300,000