REVEALED PREFERENCE METHODS

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REVEALED PREFERENCE METHODS

• MARKET ANALOGY METHOD
• TRAVEL COST METHODS
• DEFENSIVE EXPENDITURES METHOD
• INTERMEDIATE GOOD METHOD
• ASSET VALUATION METHOD
• THE HEDONIC PRICE METHOD

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Table 1 QUALY Costs

• Program
• Childhood immunizations lt0
• Prenatal care lt0
• Flu shots 1200
• Water chlorination 8K
• Pneumonia vaccination 24K
• Breast cancer screening 34K

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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)

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Regulatory Policies and Practices

• Health and Safety
• Environmental

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Figure 1 TYPES OF REGULATION
Source Thomas D. Hopkins (2006) AN ASSESSMENT OF
CROSS-NATIONAL REGULATORY BURDEN COMPARISONS.
Fordham Urban Law Journal (July 9-48)
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Figure 2 FEDERAL REGULATORY OUTLAYS
Source file///Work/Courses/ABC-04/pubfin/REGBUD
1.HTM
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Figure 3 Costs of Major Rules (1981-2007)
Source http//www.whitehouse.gov/omb/inforeg/cost
s_benefits/2008_draft_cb_report.pdf
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Figure 4 Benefits and Costs of Major Rules
(1992-2007)
Source http//www.whitehouse.gov/omb/inforeg/cost
s_benefits/2008_draft_cb_report.pdf
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Costs and Benefits Requiring Valuation
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Costs and Benefits Requiring Valuation
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MARKET ANALOGY METHOD
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MARKET ANALOGY METHOD

• Using Price of Analogous Good
• The market price of a comparable good in the
  private sector
• Problematic when beneficiaries dont 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.

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Example Using Price of Analogous good
Note distinction between Comparable and
substitutes
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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.

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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.

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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.
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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).

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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.

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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.

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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..

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TRAVEL COST METHODS
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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.

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Value of Travel Time Savings
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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.

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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.

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TRAVEL COST METHODS

• 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
  persons income, Y and variables that reflect
  the persons tastes, Z
• q f(p,ps,Y,Z)

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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.

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TCM Demand Schedule
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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.

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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

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Estimating Consumer Surplus

• By repeating this calculation for each zone, it
  is possible to calculate the total consumer
  surplus.

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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
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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) (105-100) or .05 (100K)
  (110-100)/2 25K
• SUM 320K

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Limitations of the TCM

• It is restricted to sites where people (in the
  zones) have different travel costs. Without
  variation in total cost, its 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).

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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).

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Limitations of the TCM

• 5. The method estimates the WTP for the entire
  site rather than features of the site. Its
  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.

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DEFENSIVE EXPENDITURES METHOD
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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.

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DEFENSIVE EXPENDITURES METHOD
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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.

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INTERMEDIATE GOOD METHOD
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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
  projects life.

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Asset Valuation Method
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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.

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THE HEDONIC PRICE METHOD
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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.

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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

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.
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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

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Estimating the value of a scenic view
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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).
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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.

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Estimating the value of a scenic view
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AdjustingPlug Values
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Adjusting Plug-in Values

• Time (nominal price adjustment)
• Income and Socioeconomic Factors
• Physical Characteristics
• Project Differences
• Technology, population changes, etc.

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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

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.

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