x1

1
Marshallian vs. Hicksian Demands
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
x2
M
M1
B
x21
A
x2o, h2o
IC1
C
ICo
x1
x1o, h10
Mo/p10
x11
Mo/p11
M1/p11
h11
p1
p10
A
B
p11
C
x1(p,M)
h1(p,Uo)
x1
h11
x1o, h10
x11
2
Consumer Surplus vs. Compensating Variation
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
x2
CV
M
M1
B
x21
A
x2o, h2o
IC1
C
ICo
x1
x1o, h10
Mo/p10
x11
Mo/p11
M1/p11
h11
p1
A
p10
CS
B
p11
C
x1(p,M)
h1(p,Uo)
x1
h11
x1o, h10
x11
3
x2
Consumer Surplus vs. Equivalent Variation
M1
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
EV
M
C
B
A
IC1
ICo
x1
EV
C
A
p10
CS
B
p11
x1(p,M)
(Key!)
h1(p,U 1)
x1
4
Golden Rule for Definition of CV, EV

• CV What amount of income (), given or taken
  away, would keep me at the old utility level,
  given the new price set.
• EV What amount of income (), given or taken
  away, would get me to the new utility level,
  given the old price set.

5
Golden Rule for Interpretation of CV, EV
6

• Welfare Measures

7
Compensating Surplus vs. Equivalent Surplus
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
x
A
M
B
CoS
IC1
C
BC
ICo
q
q1
qo
x
D
ES
A
M
B
IC1
ICo
q
q1
qo
8
Golden Rule for Definition of CoS, ES (virtually
same as before)

• CoS What amount of income (), given or taken
  away, would keep me at the old utility level,
  given the new quantity set.
• ES What amount of income (), given or taken
  away, would get me to the new utility level,
  given the old quantity set.

9
Golden Rule for Interpretation of CoS, ES
10
Welfare Change under Weak Complementarity
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
p1
CVo ABC CV1 AED CoS CV1- CVo BCED
D
B
p1
E
C
A
p1o
h1(p, q1, Uo)
h1(p, qo, Uo)
x1
x11
x1o
Note p prices of all market goods assume pq
0 p1 choke price for good x1
11
CoS vs. CS under Weak Complementarity
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
p1
CoS BCED CS FCHG
D
G
p1
B
F
C
A
H
p1o
E
x1(p, q1, M)
x1(p, qo,M)
h1(p, q1, Uo)
h1(p, qo, Uo)
x1
x11
x1o
Note p prices of all market goods assume pq
0 p1 choke price for good x1
12
Welfare Change under Weak Substitutability
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
p1
CVo 0BDA CV1 0BCA CoS CVo- CV1 CBD
h1(p, qo, Uo)
E
C
D
A
p1o
h1(p, q1, Uo)
B
x1
p1 0
x11
x1o
Note p prices of all market goods assume pq
0 p1 indifference price for good x1 (here
we assume its zero)
13
The Value of Time in TCMs
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
fee
D(f) - correct
5
D(f) - wrong
Total visits
B(new) 80
180

• Ignoring or underestimating time costs leads to
• over-estimating elasticity of demand
• under-estimating CS

14
Ignoring Substitutes in TCMs
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
fee (site C)
TC
Vis. / 1000
D(f) - wrong
10
D(f) - correct
Total visits to C
180
B(new) 80

• Ignoring substitute sites generally leads to
• under-estimating elasticity of demand
• over-estimating CS
• (Actual effect depends on location of sites
  relative to origins)

15
Hedonic Property Value Model Stage 1
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
Ph ()
Ph (qj)
qj
()
b1j
b2j
Ph (qj)
A
p1
C
p2
Ph (qj)
qj
q1j
q2j
16
Hedonic Property Value Model Stage 2
APEC 464 / 664 / Spring 2002 / Klaus Moeltner
b1j
()
B
p2
A
p1
P2 h (qj)
p3
C
P1 h (qj)
P3 h (qj)
qj
qo 1j
q2 1j
q1 1j
17
General Steps of a Valuation Project

• Identify natural asset to be valued
• Be as specific as possible
• Define units of measurement
• Identify stakeholders
• Who cares?
• Who is affected by any change in quality or
  quantity of natural asset?
• Sometimes identified by client (interest group,
  decision maker)
• Collect all necessary scientific information
• Choose valuation tool(s)
• This affects data collection
• Collect economic data
• Choose estimate econometric model
• Generate welfare measures in
• For status quo (proposed) changes
• To all stakeholder groups involved
• Make policy recommendation

18
Project Example Tahoe Water Clarity
19
Team Exercise

• Research Question What is the optimal level of
  clarity for Tahoe?
• Team 1
• Identify stakeholders
• Team 2
• Identify scientific information needed to feed
  into economic analysis
• Team 3
• Identify some natural assets (NMGs) affected by
  changes in lake clarity

20
Non-response bias
green environmentalist yellow skier red
high income blue low income
sample