economics 101: how to measure indirect values benjamin s. rashford agricultural and applied...
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Economics 101:How to Measure Indirect Values
Benjamin S. RashfordAgricultural and Applied Economics
University of Wyoming
What is Value?
The economic concept of value determined by
peoples willingness to make tradeoffs…
$
Quantity
P* Producer
Surplus
Consumer
Surplus
Willingness to Pay
Marginal Cost
Defining Non-market Values
Use Value:
Values associated with the tangible use of
non-market goods and services (e.g.
recreation, health benefits of clean air…)
Defining Non-market Values
Non-use (“passive”) Value:
Intrinsic values that are independent of use
• Existence (“preservation”) Value
• Bequest Value
• Altruistic Value
• Option Value
Methods for Measuring Non-Market Values
Indirect Methods (revealed preference)
Examine the market decisions people make
regarding activities that are linked to non-
market goods and services
Direct Methods (stated preference)
Elicit values directly from people using
survey methods
Methods for Measuring Non-Market Values:Indirect Methods
Hedonic Pricing Method
• people value the characteristics of goods
air quality
hous
ing
pric
e
People are willing to pay more for houses in areas with higher environmental quality
Hedonic Pricing Method (applied to wages)
People may be willing to accept lower wages in areas
with abundant ecosystem services
Methods for Measuring Non-Market Values:Indirect Methods
Income ($CN in 2000)
$27-$54k
$17-$22k
$3-$13k
$27-$54k
$33-$17k
Methods for Measuring Non-Market Values:Indirect Methods
Hedonic Pricing Method
Application to forage land:
•Scenic amenities
•Environmental quality (wildlife habitat, water,
…)
•Access to recreation
Methods for Measuring Non-Market Values:Indirect Methods
Hedonic Pricing Method
Advantages:
•Publicly available data
•Low cost
Disadvantages:
•Large data sets
•Sophisticated statistical models
Methods for Measuring Non-Market Values:Indirect Methods
Travel Cost Method
• Measures the value of resources associated
with recreation
Methods for Measuring Non-Market Values:Indirect Methods
Travel Cost Method
1. Ask visitors about their
travel cost and number
of trips
2. Estimate recreation
demand consumer
surplustrips
trav
el c
ost
Estimated demand
Value of recreation
Methods for Measuring Non-Market Values:Indirect Methods
Travel Cost Method
3. Estimate demand for
alternative site with
higher quality resources
4. Non-market value = the
additional surplus
trips
trav
el c
ost
Demand with low quality
Demand with high quality
Non-market Value
Methods for Measuring Non-Market Values:Indirect Methods
Travel Cost Method
Advantages:
•Can be very specific (value or site)
Disadvantages:
•Primary data collection ($ and time
consuming)
•Sophisticated statistical models
Methods for Measuring Non-Market Values:Direct Methods
Contingent Valuation Conjoint Analysis
Elicit values by directly asking people to state
their willingness to pay for a non-market good
WTP for a change in quality
“Waterfowl habitat in ABC Census Division is currently highly degraded due to intensive row crop production. Waterfowl habitat could be enhanced by converting cropland to forage production. If 20% of the land were converted, waterfowl populations would increase by 1%. Would you be willing to pay an additional $10 per year in property taxes if the money was used to convert cropland to forage for the purpose of improving waterfowl habitat?
Methods for Measuring Non-Market Values:Direct Methods
Contingent Valuation Conjoint Analysis
Elicit values by directly asking people to state
their willingness to pay for a non-market good
Select between alternative sets of characteristics
Hunting trip A
1. Water level is below the vegetation line
2. You see 2 ducks per hour
3. Entrance fee = $5
Hunting trip B
1. Water level is above the vegetation line
2. You see 6 ducks per hour
3. Entrance fee = $11
Methods for Measuring Non-Market Values:Direct Methods
Contingent Valuation and Conjoint Analysis
Advantages:
•Can measure non-use values
•No secondary data required
Disadvantages:
•Survey design
•Survey cost and time
•Stated vs. revealed preference
Methods for Measuring Non-Market Values:
Benefits Transfer
Uses the values estimated from existing studies
Value of waterfowl hunting
Study Region Time Frame Consumer Surplus/Trip
Cooper California 1989 $11.39 – $32.26
Hammack & Brown
Pacific Flyway
1972 $36 - $103.03
Van Kooten Alberta 1993 $23.65
Benefits Transfer
Challenges:
•Past studies must exist
•Activities, locations and populations must
correspond
Methods for Measuring Non-Market Values: