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Economics 101: How to Measure Indirect Values

Economics 101: How to Measure Indirect Values. Benjamin S. Rashford Agricultural and Applied Economics University of Wyoming. $. Marginal Cost. Consumer Surplus. P*. Producer Surplus. Willingness to Pay. Quantity. What is Value?.

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Economics 101: How to Measure Indirect Values

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  1. Economics 101:How to Measure Indirect Values Benjamin S. Rashford Agricultural and Applied Economics University of Wyoming

  2. $ Marginal Cost Consumer Surplus P* Producer Surplus Willingness to Pay Quantity What is Value? The economic concept of value determined by peoples willingness to make tradeoffs…

  3. 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…)

  4. Defining Non-market Values Non-use (“passive”) Value: Intrinsic values that are independent of use • Existence (“preservation”) Value • Bequest Value • Altruistic Value • Option Value

  5. 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

  6. housing price air quality Methods for Measuring Non-Market Values:Indirect Methods Hedonic Pricing Method • people value the characteristics of goods People are willing to pay more for houses in areas with higher environmental quality

  7. Income ($CN in 2000) $33-$17k $17-$22k $27-$54k $3-$13k $27-$54k Methods for Measuring Non-Market Values:Indirect Methods Hedonic Pricing Method (applied to wages) People may be willing to accept lower wages in areas with abundant ecosystem services

  8. 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

  9. Methods for Measuring Non-Market Values:Indirect Methods Hedonic Pricing Method Advantages: • Publicly available data • Low cost Disadvantages: • Large data sets • Sophisticated statistical models

  10. Methods for Measuring Non-Market Values:Indirect Methods Travel Cost Method • Measures the value of resources associated with recreation

  11. Estimated demand travel cost trips Value of recreation Methods for Measuring Non-Market Values:Indirect Methods Travel Cost Method • Ask visitors about their travel cost and number of trips • Estimate recreation demand  consumer surplus

  12. Demand with high quality Non-market Value travel cost Demand with low quality trips Methods for Measuring Non-Market Values:Indirect Methods Travel Cost Method • Estimate demand for alternative site with higher quality resources • Non-market value = the additional surplus

  13. 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

  14. Methods for Measuring Non-Market Values:Direct Methods Contingent ValuationConjoint 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?

  15. Methods for Measuring Non-Market Values:Direct Methods Contingent ValuationConjoint 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 • Water level is below the vegetation line • You see 2 ducks per hour • Entrance fee = $5 • Hunting trip B • Water level is above the vegetation line • You see 6 ducks per hour • Entrance fee = $11

  16. 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

  17. Methods for Measuring Non-Market Values: Benefits Transfer Uses the values estimated from existing studies

  18. Methods for Measuring Non-Market Values: Benefits Transfer Challenges: • Past studies must exist • Activities, locations and populations must correspond

  19. Methods for Measuring Non-Market Values: Conclusions: • Valuing non-market goods is hard • Detailed studies can be expensive and time consuming • Benefits transfer (if possible) can provide a policy relevant estimate for less time and money

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