AAEC 6524: Environmental Economic Theory and Policy Analysis. Outline. Introduction to Non-Market Valuation Part A. Klaus Moeltner Spring 2017

Transcription

1 AAEC 6524: Environmental Economic Theory and Policy Analysis to Non-Market Valuation Part A Klaus Moeltner Spring 207 March 4, 207 / 38 Outline 2 / 38

2 Methods to estimate damage and cost functions needed to implement policy Focus on details of interactions of HH or firm with environment Focus on econometrics, data, empirical results 3 / 38 Objective of NMV Compute monetary value of env. resources or services Not traded in markets / not subject to exchange No observable market price 4 / 38

3 Examples Preservation of open land (vs. development) Biodiversity vs. lumber Multi-use forest management (recreation) Value of water cleanup Value of health risk reduction Use vs. non-use values Values to future generations 5 / 38 Role of Neoclassical Welfare Theory Parts I, II: Used neoclassical welfare theory to derive optimal policy rules Here: Use neoclassical theory to design measurement methods needed to implement policy rule In most cases this means learning about people s preferences 6 / 38

4 Definition of monetary value individual-specific policy-context specific Usually we start with baseline state of E Policy suggests ending state Value measured as WTP (to secure (desirable) ending state) Or as WTA (to forgo (desirable) ending state) These are called Property rights determine if WTP or WTA is relevant measure. 7 / 38 General strategy Start with observed behavior (e.g. Marshallian demand for market good that is related to env. quality) Estimate parameters of underlying preference structure (usually means utility function ) Use these parameter estimates to compute Aggregate over population & compare to cost of policy 8 / 38

5 General setup U (x, z, q) where: x = J-dim.vector of private market goods z = numeraire good (p z = ) q = env. good or service (scalar or vector) 9 / 38 Examples for q health effects recreational amenities residential amentities ecosystem services exposure to risk public goods (in general) Assume q is a known scalar quantity, expressed in known units, generates positive marginal utility 0 / 38

6 Consumer problem max x,z U (x, z, q) + λ (y z p x) FOC: U/ x j = λp j, y = z + p x j =... J Assuming an interior solution, one can solve for: ordinary demands x j (p, y, q) Lagrange multiplier λ (p, y, q), and the level of z / 38 Consumer problem Noteworthy: Ordinary demand functions depend only on observables directly estimable Via envelope theorem, λ (.) = increase in utility due to small change in income constraint ( marginal utility of income ) Substituting demand functions into utility function yields the Indirect Utility Function (IUF), V (p, y, q) 2 / 38

7 Dual problem: Expenditure minimization The consumer s behavior can also be represented by the expenditure minimization problem: min x,z (p x + z + µ (ū U (x, z, q))) ū is some reference level of utility 3 / 38 Dual problem: FOCs U x j = p j µ j =... J, U z = /µ U (.) = ū Obtain compensated demand functions h j (p, ū, q), h z (p, ū, q) These are not directly estimable (depend on ū rather than income) 4 / 38

8 Dual problem: Expenditure function Substituting compensated demand functions into the expenditure minimization problem yields the expenditure function E (p, ū, q) Gives smallest amount of income a person would need to reach utility level ū 5 / 38 Closer look at duality Assume that at the observed point of consumption we have U (.) = u 0 Then: y = E ( p, u 0, q ), expenditure needed to obtain u 0 Also: x j ( p, E ( p, u 0, q ), q ) h j ( p, u 0, q ) j 6 / 38

9 Slutsky equation x j (p,y,q) p j = h j(p,u 0,q) p j x j (p,y,q) y x j (p, y, q) So price effects for ordinary and compensated demand functions differ by an income effect x j (p,y,q) y x j (p, y, q) If this effect is zero, the two demand functions are equivalent. 7 / 38 Income and substitution effect Note: Utility is held constant (at u 0 ) for movements in price along the compensated demand function In contrast: Movements in price along the ordinary demand function trigger two confounded effects: pure price effect h j(p,u 0,q) p j ( substitution effect ), and income effect x j (p,y,q) y x j (p, y, q) 8 / 38

10 Income and substitution effect This implies utility changes as we move along the ordinary (uncompensated) demand curve This has important implications for the types of we use in NMV Old debate: Is income effect small enough to interpret observed demands as compensated demands? 9 / 38 Income and substitution effect Marshallian vs. Hicksian Demands x 2 M x 2 x 2o, h 2 o M A C B IC IC o p x o, h 0 M o /p 0 h x M /p M o /p x p 0 A p B C x (p,m) x o, h 0 h x h (p,u o ) x 20 / 38

11 Welfare measures for price changes How does a change in price affect the well-being of the affected population? Examples: Reduction in tuition Increase in entry fees for State Parks Increase in fishing license fees No more parking fees on campus 2 / 38 Compensating Variation Price decrease: Amount of money that would need to be taken from an individual to restore her to (keep her at) the original utility level. Price increase: Amount of money that would need to be given to an individual to restore her to (keep her at) the original utility level. Thus, CV uses the pre-change utility level as a reference point. 22 / 38

12 Compensating Variation Implicitly defined via: V ( p 0, y, q ) = V ( p, y CV, q ), where (as written) CV > 0 for a price decrease, CV < 0 for a price increase 23 / 38 Compensating Variation and Consumer Surplus Consumer Surplus vs. Compensating Variation x 2 M CV x 2 x 2o, h 2 o M A C B IC IC o p x o, h 0 M o /p 0 h x M /p M o /p x CV p 0 A CS p B C x (p,m) x o, h 0 h x h (p,u o ) x 2 24 / 38

13 Interpretation of CV Price decrease: Maximum amount of money person would pay to obtain the lower price (maximum willingness to pay, WTP) This would leave her indifferent between the status quo (high price, original income) and the new status (low price, reduced income) Price increase: Minimum amount of money person would accept to agree to the higher price (minimum willingness to accept, WTA) This would leave her indifferent between the status quo (low price, original income) and the new status (high price, increased income) 25 / 38 Property Rights Important caveat: These interpretations implicitly assume that the consumer has the property right to the status quo. Consumer has right to NOT have a price increase. (Else we must compensate her) Consumer has no right / claim to lower prices. (Must pay to obtain them) This view of property rights are not always realistic in a given application. 26 / 38

14 Equivalent Variation Price decrease (increases utility): Amount of money that would need to be given to an individual to bring her to the new utility level in absence of the price change. Price increase (decreases utility): Amount of money that would need to be taken from an individual to bring her to the new utility level in absence of the price change. Thus, EV uses the post-change utility level as a reference point. 27 / 38 Equivalent Variation Implicitly defined via: V ( p, y, q ) = V ( p 0, y + EV, q ), where (as written) EV > 0 for a price decrease, EV < 0 for a price increase 28 / 38

15 Equivalent Variation and Consumer Surplus M x 2 Consumer Surplus vs. Equivalent Variation EV M C A B IC IC o x EV p 0 p A C B CS x (p,m) h (p,u ) (Key!) x 3 29 / 38 Interpretation of EV Price decrease: Minimum amount of money person would accept to forego the lower price (minimum willingness to accept, WTA) This would leave her indifferent between the new status (low price, original income) and the new status (high price, increased income) Price increase: Maximum amount of money person would pay to avoid the higher price (maximum willingness to pay, WTP) This would leave her indifferent between the new status (high price, original income) and the new status (low price, decreased income) 30 / 38

16 Property Rights Important caveat: These interpretations implicitly assume that the consumer has the property right to the new status. Consumer has right to have a price decrease. (Else we must compensate her) Consumer has no right / claim to keep exisiting lower prices. (Must pay to preserve them) This view of property rights are not always realistic in a given application. 3 / 38 Golden Rule for Definition of EV, CV 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. 32 / 38

17 Golden Rule for Interpretation of EV, CV Golden Rule for Interpretation of CV, EV Welfare Measure Implied Property Rights in: Price decrease Price increase CV Status Quo WTP to obtain WAC to accept EV Change ( New Status ) WAC to forgo WTP to avoid 5 33 / 38 Corollary to Golden Rule Corollary to Golden Rule: If consumer s property rights are not clearly (i.e legally) assigned to either Status, assign them to the Status that corresponds to the lower utility level. Then apply the Golden Rule for Interpretation of EV, CV as before. 34 / 38

18 CV, EV examples See slides posted under CV / EV examples. 35 / 38 Alternative analytical expressions Via expenditure function: CV = E ( p 0, u 0, q ) E ( p, u 0, q ) = y E ( p, u 0, q ) EV = E ( p 0, u, q ) E ( p, u, q ) = E ( p 0, u, q ) y 36 / 38

19 Alternative analytical expressions By Sheppard s Lemma: h j (p, u, q) = E(p,u,q) p j, thus: CV = p 0 j p j h j ( pj, p j, u 0, q ) dp j EV = p 0 j p j h j ( pj, p j, u, q ) dp j Simple - if we could observe h j (.) / 38 Summary graph 36 Figure 4. Price Change Welfare Measures z Panel A E(p0,u,q) y Panel B d V EV CV y0 p 0 u 0 U E(p0,u 0,q)= E(p,u,q) E(p,u 0,q) b c WTP a WTA V 0 p x0 c d p0 x p x p p0 p p h(p,u 0,q) p0 a d p c b x(p,y,q) x0 x h(p,u,q) x Panel C 2 April / 38