Social Discount Rate Travel Costs

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Social Discount RateTravel Costs

• Scott Matthews
• Courses 12-706 and 73-359
• Lecture 14 - 10/15/2003

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Admin Issues

• Early Course Evals
• HW 2 Overview, results (mean42)
• Optional Friday recitations/project review
  sessions
• Scheduling of Project Presentations

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Social Discount Rate

• Discounting rooted in consumer preference
• We tend to prefer current, rather than future,
  consumption
• Marginal rate of time preference (MRTP)
• Face opportunity cost (of foregone interest) when
  we spend not save
• Marginal rate of investment return

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Intergenerational effects

• We have tended to discuss only short term
  investment analyses (e.g. 5 yrs)
• What about effects in distant future?
• Called intergenerational effects
• Economists agree that discounting should be done
  for public projects
• Do not agree on positive discount rate

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An example

• Someone offers you choice of 1000 now and 1200
  in one year
• If you have no preference (indifferent) then your
  MRTP is 20

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Discounting handout

• How much do/should we care about people born
  after we die?
• Higher the discount rate, the less future values
  will count compared to today
• Ethically, no ones interests should count more
  than anothers
• Implies there is no justification for discounting
  across long time periods
• Called equal standing

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Climate Change

• Discussions ongoing about how best to manage
  global CO2 emissions to limit effects of global
  change
• Should we sacrifice short-run economic growth to
  do something to improve environment and leave
  resources for the future?
• Really asking 2 separate questions!

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Two Questions

• What duty do we have to make sacrifices for
  future generations?
• If we sacrifice, what is the optimal policy to
  maximize benefit?
• So we should compare global change proposals with
  alternatives
• Perhaps higher RD spending on science or
  medicing would have higher benefits!

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Humes Law

• Thus discounting issues are normative vs.
  positive battles
• Hume noted that facts alone cannot tell us what
  we should do
• Any recommendation embodies ethics and judgment
• E.g. focusing on highest NPV implies net
  benefits is only goal for society

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Some evidence

• Cropper et al surveyed 3000 homes
• Asked about saving lives in the future
• Found a 4 discount rate for lives 100 years per
  now
• Equal standing does not imply different
  generations have equal claims to present
  resources!
• Harsanyi says only do so if their marginal gain
  is higher than our loss

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More evidence

• If future generations will be better off than us
  anyway
• Then we might have no reason to make additional
  sacrifices
• There might be special standing in addition to
  equal standing
• Immediate relatives vs. distant relatives
• Different discount rates over time
• Why do we care so much about future and ignore
  some present needs (poverty)

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Travel Costs

• Time is a valuable commodity (time is )
• Most major transportation/infrastructure projects
  built to save travel costs
• Need to tradeoff project costs with benefits
• Ex new highway that shortens commutes
• Differences between travel and waiting
• Waiting time disutility might be orders of
  magnitude higher than just travel disutility
• Why? Travelling itself might be fun

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Valuation Travel Cost Method

• Estimate economic use values associated with
  ecosystems or sites that are used for recreation
• changes in access costs for a recreational site
• elimination of an existing recreational site
• addition of a new recreational site
• changes in environmental quality
• www.ecosystemvaluation.org/travel_costs.htm

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Travel Cost Method

• Basic premise - time and travel cost expenses
  incurred to visit a site represent the price of
  access to the site. 
• Thus, peoples WTP to visit the site can be
  estimated based on the number of trips that they
  make at different travel costs. 
• This is analogous to estimating peoples WTP for
  a marketed good based on the quantity demanded at
  different prices.

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Example Case

• A site used mainly for recreational fishing is
  threatened by development. 
• Pollution and other impacts from this development
  could destroy the fish habitat
• Resulting in a serious decline in, or total loss
  of, the sites ability to provide recreational
  fishing services. 
• Resource agency staff want to determine the value
  of programs or actions to protect fish habitat at
  the site.

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Why Use Travel Cost?

• Site is primarily valuable to people as a
  recreational site.  There are no endangered
  species or other highly unique qualities that
  would make non-use values for the site
  significant.
• The expenditures for projects to protect the site
  are relatively low.  Thus, using a relatively
  inexpensive method like travel cost makes the
  most sense.
• Relatively simple compared to other methods

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Options for Method

• A simple zonal travel cost approach, using mostly
  secondary data, with some simple data collected
  from visitors.
• An individual travel cost approach, using a more
  detailed survey of visitors.
• A random utility approach using survey and other
  data, and more complicated statistical
  techniques.

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Zonal Method

• Simplest approach, estimates a value for
  recreational services of the site as a whole. 
• Collect info. on number of visits to site from
  different distances.  Calculate number of visits
  purchased at different prices. 
• Used to construct demand function  for site,
  estimate consumer surplus for recreational
  services of the site.

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Zonal Method Steps

• 1. define set of zones around site.  May be
  defined by concentric circles around the site, or
  by geographic divisions, such as metropolitan
  areas or counties surrounding the site
• 2. collect info. on number of visitors from each
  zone, and the number of visits made in the last
  year. 
• 3. calculate the visitation rates per 1000
  population in each zone.  This is simply the
  total visits per year from the zone, divided by
  the zones population in thousands. 

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Sample Data
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Estimating Costs

• 4. calculate average round-trip travel distance
  and travel time to site for each zone.  Assume
  Zone 0 has zero travel distance and time.  Use
  average cost per mile and per hour of travel
  time, to calculate travel cost per trip. 
  Standard cost per mile is 0.30.  The cost of
  time is from average hourly wage.  Assume that it
  is 9/hour, or 0.15/minute, for all zones,
  although in practice it is likely to differ by
  zone. 

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Data
5. Use regression to find relationship between
visits and travel costs, e.g. Visits/1000 330
7.755(Travel Cost)
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Final steps

• 6. construct demand for visits with
  regression. First point on demand curve is total
  visitors to site at current costs (with no entry
  fee), which is 1600 visits.  Other points by
  estimating number of visitors with different
  hypothetical entrance fees (assuming that an
  entrance fee is valued same as travel costs). 
  Start with 10 entrance fee.  Plugging this into
  the estimated regression equation, V 330
  7.755C

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Demand curve

• This gives the second point on the demand
  curve954 visits at an entry fee of 10.  In the
  same way, the number of visits for increasing
  entry fees can be calculated

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Graph
Consumer surplus area under demand curve
benefits from recreational uses of site around
23,000 per year, or around 14.38 per visit
(23,000/1,600).  Agencys objective was to
decide feasibility to spend money to protect this
site.  If actions cost less than 23,000 per
year, the cost will be less than the benefits
provided by the site.
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Value - travel time savings

• Many studies seek to estimate VTTS
• Can then be used easily in CBAs
• Book reminds us of Waters 1993 (56 studies)
• Many different methods used in studies
• Route, speed, mode, location choices
• Mean value of 48 of wage rate (median 40)
• North America 59/42
• Miller (1989) 60 drivers, 40 passengers
• 90 drivers/60 passengers in congested areas

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Monetary studies

• NCHRP 2-18 (1995) National Cooperative Highway
  Research Program
• Stated preference survey method
• 15,000 income gt 2.64/hour VTTS
• 55,000 _at_ 5.34/hour
• 95,000 _at_ 8.05/hour (decreasing)

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Government Analyses

• Again, travel versus leisure important
• Wide variation 11 to 51!
• Income levels are important themselves
• VTTS not purely proportional to income
• Waters suggests square root relation
• E.g. if income increases factor 4, VTTS by 2
• Typically 40-60 of hourly rate in CBAs
• US DOT 50 of wage rate - local travel
• 70 of wage for intercity personal travel
• 100 of wage (plus fringe) - intercity business
  travel

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Recreation Benefits

• Value of recreation studies
• Values per trip -gt value per activity day
• Activity day results (Sorg and Loomis 84)
• Sport fishing 25-100, hunting 20-130
• Camping 5-25, Skiing 25, Boating 6-40
• Wilderness recreation 13-75
• Are there issues behind these results?