Economics

# Revealed Preference Techniques

May 7, 2012, 6:49 pm
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Value of Yosemite National Park (A) Demand curve (red) of added costs ($U.S.) versus thousands of visits to Yosemite National Park in California during 1953. Area under the curve (light red) estimates the annual recreational value of Yosemite, about$15 m

Cost–benefit analyses for the large-scale projects to mitigate climate change may require assessment of goods or services for which market data is unavailable. How does one put a price tag on the Sydney Opera House or the temple at Abu Simbel- structures that are national treasures? On what basis did someone select a few archeological sites for relocation out of the thousands flooded by the Aswan and Three Gorges Dams? Analysts and planners estimate the value of non-marketed goods or services based on either revealed preference or stated preference techniques. [1]

Revealed preference techniques

Revealed preference techniques associate a non-market good or service with the actual markets for a complementary (i.e., surrogate or proxy) good or service. Because complementary markets depend on the use of a good or service, indirect revealed preference techniques can evaluate some of the value associated with historical significance, reputation, diversity, or uniqueness. Methods to gauge revealed preferences include analyses of travel costs, avertive/abatement costs, and hedonic prices.

• Travel cost analysis estimates the monetary value of recreational or educational sites. [2] Analysts or planners calculate the number of visits to the site from people living in various locations; the average travel cost per visit from various locations; and the number of visits per capita from various locations as a function of average travel costs and other demographic factors. From this relationship, analysts or planners predict how the number of visits to the site of interest from a given location will vary with rising costs such as higher entrance fees or higher gasoline prices. The sum of visitors from all locations as a function of rising costs produces a demand curve. Area under the demand curve (consumer surplus) provides an estimate for the recreational or educational value of a site.

• Avertive/abatement cost analysis examines the expenditures of consumers on preventive measures to reduce damages from undesirable factors such as pollution or accidents (HEATCO 2007). It assumes that these measures are optimal at the point where their marginal cost (expenditure on the last unit purchased) equals their marginal value of reduced impact (reduced damages resulting from purchasing one more unit). Goods that individuals buy to avert pollution include air filters, water purifiers, and noise insulation; those that they buy to avert accidental injury include seat belts and fire detectors.

• Hedonic price analysis divides a good or service into its constituent parts and estimates the market values of each part. Because environmental factors play a major role in the price of a property and in wages earned for a job, differences in property values or wages provide an estimate of the market value of environmental factors. For example, wages are higher for jobs in unpleasant environments than for those that require similar skills but are conducted under better working conditions: Divers who clean industrial waste traps receive higher wages than divers who clean the hulls of yachts in tropical ports.

[1] Pearce, D. and E. Özdemiroglu (2002) Economic Valuation with Stated Preference Techniques: Summary Guide, Department for Transport, Local Government and the Regions, London, http://www.communities.gov.uk/documents/corporate/pdf/146871.pdf.

[2] Clawson, M. and J. L. Knetsch (1966) Economics of Outdoor Recreation, Published for Resources for the Future by Johns Hopkins Press, Baltimore.

This is an excerpt from the book Global Climate Change: Convergence of Disciplines by Dr. Arnold J. Bloom and taken from UCVerse of the University of California.

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