Revealed Preference Methods

1
Revealed Preference Methods
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New Bedford

• New Bedford Harbor is a major commercial fishing
  port and industrial center in southeastern
  Massachusetts on Buzzards Bay. From the 1940s to
  the 1970s, electrical parts manufacturers
  discharged wastes containing PCBs and toxic
  metals into New Bedford Harbor, resulting in high
  levels of contamination throughout the waters,
  sediments and biota of the Harbor and parts of
  Buzzards Bay. Hundreds of acres of marine
  sediment were highly contaminated. One location
  contained the highest concentrations of PCBs ever
  documented in a marine environment.

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CERCLA

• Comprehensive Environmental Response,
  Compensation, and Liability Act
• Aka Superfund
• Allows EPA to name potentially responsible
  parties
• Anyone who owned the property while the toxin
  leaked to the environment.
• Very wide net

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Cercla

• Either the parties clean it up or EPA does and
  sends them the bill
• Spawned huge litigation over who was responsible.
• Required remediation
• Allowed Natural Resource Damages
• E.g. lost fishing, beach recreation etc.

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How Much

• The 5 companies that were found to be responsible
  for the damages to New Bedford Harbor paid 110
  million. Of that total, the amount attributed to
  damages to beach recreation and to fishing was
  20.2 million
• This is real money.

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Types of Value

• Use value.
• Fishing
• Beach visiting
• Can estimate use value based upon observations
  about usage
• Passive or non use values
• I like wolves in yellowstone but I dont go
  there.
• Cant measure value based on observations of usage

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Value of Non Market Goods

• Revealed Preference
• Observe actions and deduce value
• Travel Cost
• Hedonic
• Averting behavior
• Stated Preference
• Ask

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Marketed or Non Marketed

• Marketed
• Electricity
• Can measure use value by looking at electric
  meter
• Non Marketed
• Outdoor recreation
• Challenge is to measure non marketed use values.

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Data on Beach Visits
Table 6.1 Hypothetical data on the price and
quantity of beach visits.
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Regression

• Statistical method to fit line to data points.
• For our purposes only need to know that we can
  recover a formula for a line from the data points
• Next slide plots our points and shows the line
  closest to those points in the sense that the
  squares of the vertical distances between point
  and line are minimized. (called least squares)

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Plot of Data
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• Q 30 5 P
• Is the formula for the line.
• We could find the area under the line and that
  would be total willingness to pay.

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Hotelling

• Show Hotellings letter and read it.

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Fort Point Beach

• Is in New Bedford Harbor.
• It is visited.
• Get data on visits to find value of beach.
• Ted McConnel did this and it was the first of the
  natural resource damage cases.

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Five observations on costs of travel to Fort
Point and other beaches .
Travel costs are in 1986 dollars. They include
the cost of time
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Sample Calculation

• five miles from the beach
• automobile of 42 cents. .
• Fifteen minutes travel
• wage rate (after taxes) were 8 per hour
• Cost of commute time would be 2.
• Her total cost of traveling to Fort Point would
  then be 2.42.

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Demand Curve

• Number of trips 12.43 -5.48 travel cost to
  Fort Point 2.03 travel cost to nearest other
  beach 2.03 travel cost to second nearest
  other beach

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Demand Shift

• The first time he ask people how many trips they
  would make given that they knew there were PCBs
  in the harbor. The second time he asked how many
  trips they would make if there were no PCBs in
  the harbor

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Damage Estimate

• two demand curves that were calculated from 495
  randomly selected people in the area.
• area under the demand curves is twtp.
• the difference between the areas under these two
  curves gives the estimate of the lost consumer
  surplus in beach recreation from PCB
  contamination for the 495 people.
• he divided his estimate by 495 to get consumer
  surplus per person, and he multiplied that value
  by the number of people in New Bedford (adjusted
  for those that did not go to the beach.). This
  gave him an estimate of the losses in beach
  recreation for a single year.

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Kerrys creek

• Kerry Smith was asked to find value of lost
  recreation from mine leakage.
• Leakage ruined creek below confluence and not
  above.
• So he too difference in recreation value in the
  two zones.
• He didnt have to ask, how many times would you
  go fishing without the arsenic..

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Walt Disney and Mineral King
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Travel Cost Method

• (Krutilla and Fisher. Economics of Natural
  Environments. Johns Hopkins University Press.
  Baltimore. 1975. pp189-218.
• miles to measure price
• income by county of origin
• number of skiers by ski area
• D(y, pThisArea, pOtherAreas, snow conditions?)

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Cost Benefit Analysis

• A project is not bad if the benefits (to whomever
  they may accrue) are greater than the costs.
• Take 20 from a homeless person and (magically)
  give 21 to Bill Gates
• Take 100 from Bill Gates and give 20 to a
  homeless person.

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Should Mineral King be a Ski Area

• Would a new area make sense
• Cost of new area (25 million dollars, present
  value at 9)
• Cost of road (25 million dollars)
• Willingness to pay for new area (8.2 to 26.7
  million dollars present value)
• Do we need to know what it is worth as
  Wilderness?

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Why did Disney want it?

• Who paid and who benefited?
• Beers, restaurants and lodging
• long, steep, slippery road
• monopoly profits to Disney
• how does that change Disneys analysis
• how does that change the public choice problem

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Hedonic Pricing

• First known example
• Price of cucumbers explained by length, width and
  color.
• General idea
• Explain price of something based upon its
  characteristics.
• Frequent use
• House prices depend on sq ft, lot size, number of
  bathrooms, view and so on.
• Method regress price on characteristics

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Example

• Show the Ligget and Bockstael example.
• Note the coliform bacteria.

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Averting behavior

• Water is contaminated.
• Decide to drink bottled water
• Cost of bottled water is the estimate of the
  damage from the contamination.
• Do you believe this? Would you let me poison
  your household water if I supplied you with
  bottled water?

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Final comment

• In this type of analysis, only the lack of direct
  use leads to damages. So coliform in the bay or
  pcbs in the harbor only affect those who live
  nearby or use the resource.