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

Finally, a paired comparison exercise involves respondents choosing their favourite alternative
out of a set of two and then indicating the strength of their preference on a numeric or
semantic scale.
The key questionnaire design stages that are specific to choice modelling studies are:
selecting the attributes of the good;
assigning levels to the attributes;
creating the alternative descriptions of the good; and then
constructing the specific choices that are presented to respondents.
Attributes are typically chosen through literature reviews, focus groups, and interviews with
policy makers. The attributes of the good that people attach value to and the attributes that
may be affected by any policy are those that are relevant. As noted above, a monetary cost
(price) must be one of the attributes in order to derive WTP estimates. The levels that the
attributes take should be realistic and span a sensible range. The total possible number of
alternative descriptions of the good is determined by the chosen number of attributes and the
chosen number of levels that each attribute can take. Finally, a number of specific choices
(choice sets) are constructed.
Applying Revealed Preference Methods
A number of papers provide a more detailed introductory treatment of a number of areas
covered here. Parsons (2003) provides a detailed practical overview of the key steps involved
in applying the travel cost method. Taylor (2003) focuses on the practicalities associated with
the valuation of environmental amenities using housing markets. Sheppard (1997) also
presents a useful primer on the theoretical foundations and implementation of the hedonic
analysis of housing markets. The main issues arising with the use of labour markets to
estimate the statistical value of a life is covered by Viscusi (1993) and Viscusi and Aldi (2002).
The Hedonic Pricing Method
The hedonic pricing method derives estimates of the value of a non-market good through
observations on real choices made in actual markets. Housing and labour markets are the most
common applications. In the former, the intuition is that the price differential between
otherwise identical houses that differ in their exposure levels to non-market goods and ‗bads‘
such as pollution, noise, crime or education facilities reveals information regarding individuals‘
WTP for such goods. Labour market applications follow a similar logic, though the focus is
typically on the compensating wage differentials that are paid in relation to job characteristics
such as health and safety risks or job security.
Theoretical Foundations
Viscusi (1993) presents a useful overview of the main elements of the basic theory for labour
market applications. This is captured here in order to provide a basis for understanding issues
related to the methods application. In brief, the model relates to the trade-off that the supply
and demand side of the labour market makes over wage (w) and job-characteristic (r)
combinations. For example, for any given firm to offer less injury risk to its workers while
maintaining the same level of profits, it will have to offer a lower wage rate. Each firm has
therefore has a wage-risk offer curve. Since any worker will select the highest possible wage for
a given level of risk, the outer envelope of each firm‘s offer curve gives the market opportunities
locus. On the supply side, each worker will have their own preferences over risk/wage trade-offs.
However, all will be willing to give up some wages for some reduction in risk probability. The
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