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AGEC 608: Lecture 9

AGEC 608: Lecture 9. Objective: Assess “existence value” and describe the method of partitioning of benefits Readings: Boardman, Chapter 9 Homework #3: Chapter 4, problem 2 Chapter 5, problem 1 Chapter 6, problem 4 due: March 27

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AGEC 608: Lecture 9

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  1. AGEC 608: Lecture 9 • Objective: Assess “existence value” and describe the method of partitioning of benefits • Readings: • Boardman, Chapter 9 • Homework #3: Chapter 4, problem 2 Chapter 5, problem 1 Chapter 6, problem 4due: March 27 • Homework #4: Chapter 7, problem 3 Chapter 10, problems 1 + 2 Chapter 13, problem 3due: April 11

  2. Existence value People derive value from resources, even if those resources are not “used” in any of the conventional senses. Four complications: 1. Distinguishing nonuse from passive use 2. Separating use value from nonuse value 3. Assessing the impact of quantity changes 4. Problems of motivation and measurement

  3. Use values Active use Rivalrous consumption (logging forest) Direct nonrivalrous consumption (hiking in forest) Indirect nonrivalrous consumption (watching film) Passive use option value (possibility of visiting in future) pure existence value (intrinsic value of resource) altruistic existence value (others hiking) bequest value (future hikers)

  4. Distribution of benefitstypically depends on type of benefits Example 1 Study of nature sites in Great Britain by Willis Active use (10-12% of WTP) Option value (10-12% of WTP) Passive/nonuse (remainder, key to NB>0)

  5. Distribution of benefitstypically depends on type of benefits Example 2 Study of Camden Yards by Hamilton and Kahn(standing only for Maryland residents) Jobs $ 0.48 millionOutside taxes $ 1.25 millionAdmission taxes $ 1.20 millionSales taxes $ 0.43 millionAnnual costs -$14.00 million Net benefits -$10.64 millionAny existence value?

  6. How to measure existence values? In general, a very difficult problem Direct elicitation difficult to partition benefits Behavioral “traces”membership duesmarkets for substitutes or complementstime allocation

  7. Partitioning benefits Hypothetical policy with multiple benefits Goods: E (price Pe) existence value X (price Px) hikingZ (price Pz) everything else Q = quality of resources Utility function U(E, X, Z; Q) = QEa + QXb + Zc Budget B = PeE + PxX + PzZ Maximize U – λ[B- PeE - PxX – PzZ]

  8. Partitioning benefits Some numerical assumptions: Q=1 a = 0.50 b = 0.75 c = 0.90 Pe = 0.50 Px = 1Pz = 2 B = 100

  9. Partitioning benefits Solution: E (price Pe) existence value X (price Px) hikingZ (price Pz) everything else Q = quality of resources Utility function U(E, X, Z; Q) = QEa + QXb + Zc Budget B = PeE + PxX + PzZ Maximize U – λ[B- PeE - PxX – PzZ]

  10. Partitioning benefits Approach: 1. solve for a “base” level of utility, at a given set of prices, for a given budget constraint. 2. set a price for one or more goods at which demand goes to 0 this is called the “choke price” 3. find the level of expenditure on other items at which the utility level in (2) is the same as in (1). 4. The difference in expenditure level is the value of the good.

  11. Partitioning benefits Numerical example: www.agecon.purdue.edu/staff/shively/courses/AGEC608/lectures/partioning.xls

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