Valuation Techniques for Social Cost-Benefit Analysis: - HM Treasury

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14 The total welfare (or consumer surplus) that an individual i derives from the site over a year (CS i) is given by pchoke CS f p , ps , m , x ) i p i i i i i ( dp (11) i That is, the consumer surplus is given by the area under their demand curve between the price of their visits (p i) and the price at which their visit frequency would fall to zero, known as their choke price (p choke). Simple travel cost model applications consist of collecting data in order to measure the variables in the equation (10) above. This equation is then estimated to derive an individual level demand curve for the site. Finally, to derive estimates of the total use value of the site the consumer surplus estimate from this demand curve is aggregated with either visitation or population totals. Parsons (2003) presents a more detailed treatment of the econometric model and aggregation steps for travel cost models. 3.3. The Life Satisfaction Approach The central assumption of the life satisfaction approach is that measures of life satisfaction are good proxies of an individual‘s underlying utility. In this sense, the utility function and its level sets (the indifference curves) can be directly observed and it is possible to estimate the marginal rates of substitution (MRS) between income and the non-market good to provide an estimate of EV or CV. For example, if a 20% reduction in local crime rates increases the life satisfaction of an individual by 1 index point and an increase in household income of £5,000 p.a. also increases their life satisfaction by 1 index point, then we would conclude that the value of the 20% reduction in crime to them is £5,000 per year. Formally, EV and CV are estimated as follows in the LS approach: 0 1 0 0 0 o v ( p , Q , M ) v( p , Q , M WTP ) (12) where WTP EV LS 0 0 0 0 1 o v ( p , Q , M ) v( p , Q , M WTA ) (13) where WTA CV LS In practice (12) and (13) are estimated econometrically using the direct utility function in (1). The direct utility function is estimated by applying regression analysis to panel or cross-sectional survey data to measure the impact of non-market goods on life satisfaction. Using panel data the following life satisfaction function is estimated: LS M Q X (14) it 1 it 2 it 3 it it where it M is the income of individual i at time t, Q is the level of a non-market good it consumed or provided to individual i at t and X is a vector of individual characteristics and it other factors that impact on life satisfaction. The coefficient β2 is an estimate of the impact of the non-market good on life satisfaction. WTP and WTA can be estimated by calculating LS LS LS LS
the MRS between income and the non-market good using the estimated coefficients from (14). Formally WTP can be represented as follows: LS 0 1 0 0 LS M Q X ) LS ( ( M WTP ) Q X ) (15) ( 1 it 2 it 3 it it 1 it LS 2 it 3 it it re-arranging to give: 1 0 ( Q Q ) 2 it it WTP (16) LS 1 Here WTP can be estimated using the sub-sample that receives or gains the non-market good. 0 1 This is the sub-sample that experiences Q Q . Similarly, WTA can be calculated as follows: LS 0 0 0 1 LS M Q X ) LS ( ( M WTA ) Q X ) (17) ( 1 it 2 it 3 it it 1 i LS 2 it 3 it it 1 0 ( Q Q ) 2 it it WTA (18) LS 1 Here WTA can be estimated using the sub-sample that loses or forgoes the non-market good. 1 0 This is the sub-sample that experiences Q Q . It is also possible to estimate equation (14) using other measures of well-being as the dependent variable. An implicit assumption in the literature is that out of the range of well-being variables that are available, life satisfaction represents the closest measure to the economist‘s notion of utility and has therefore been used most frequently. Clark and Oswald (2002) use life satisfaction and the General Health Questionnaire (GHQ) index of mental health as proxies for utility. Powdthavee and van Praag (2011) use a range of well-being indicators when valuing health states. Generally, using life satisfaction as the well-being measure results in lower value estimates because income is more strongly correlated with life satisfaction. In this paper we take the standard approach and focus on life satisfaction. Estimation Monetary values for a wide range of non-market goods and ‗bads‘ have been estimated using the life satisfaction approach. Annex B tabulates the main life satisfaction method studies to date. In Chapter 4 below we discuss the main methodological challenges associated with the life satisfaction approach. With reflection on this, in Chapter 5 we then provide some guidelines and a description of the estimation procedure for the life satisfaction approach. 15
Page 1 and 2: Valuation Techniques for Social Cos
Page 3 and 4: Official versions of this document
Page 5 and 6: Foreword The Government is committe
Page 7 and 8: 1 Introduction The Green Book refer
Page 9 and 10: 2 Background: Monetary Valuation Ec
Page 11 and 12: 3 Valuation Methods This chapter pr
Page 13: The two most common revealed prefer
Page 17 and 18: 18 discussion here is also relevant
Page 19 and 20: 20 Loomes (2006) reviews a number o
Page 21 and 22: 22 The theory of constructed prefer
Page 23 and 24: 24 learning and experience Bateman
Page 25 and 26: 26 life in general (Schwarz and Str
Page 27 and 28: 28 well-trained interviewers (Carso
Page 29 and 30: 30 make definitive statements regar
Page 31 and 32: 32 o Market imperfections o Measuri
Page 33 and 34: 34 See Blumenschein et al. (2008) f
Page 35 and 36: 36 The hedonic approach rests on th
Page 37 and 38: 38 As already discussed in section
Page 39 and 40: 40 illusion. Instead, respondents a
Page 41 and 42: 42 Data The British Household Panel
Page 43 and 44: 44 either Dolan et al.‘s (2011b)
Page 45 and 46: 46 Without a lagged model that acco
Page 47 and 48: 48 nearly twice the size of average
Page 49 and 50: 50 Here we discuss some of the inte
Page 51 and 52: 7 Conclusion This paper serves as a
Page 53 and 54: 56 from the knowledge that the poin
Page 55 and 56: 58 Regardless of the elicitation fo
Page 57 and 58: 60 market clears with each worker s
Page 59 and 60: 62 Single-site travel cost model ap
Page 61 and 62: 64 Luechinger (2009) Germany Air qu
Page 63 and 64: 66 Boyle, K. 2003. Contingent Valua
Page 65 and 66:
68 Dolan, P., Kahneman, D., 2008. I
Page 67 and 68:
70 Guria, J., Jones-Lee, M., Leung,
Page 69 and 70:
72 Krutilla, J. V. 1967. Conservati
Page 71 and 72:
74 Powdthavee, N., 2008. Putting a
Page 73 and 74:
76 van den Berg, B., Ferrer-i-Carbo
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