Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

The main specific methods are:- hedonic pricing method- travel cost method- averting or defensive behaviour method- cost of illness methodHedonic pricing methodThe focus of this method is in the observation of behaviour in markets for goods related to the ones the analyst isevaluating. The starting point is the fact that the prices of many market goods are functions of a bundle ofcharacteristics. For example, the price of a washing machine usually depends on the variety of washing programmes,its energy efficiency and its reliability. Through statistical techniques the method tries to isolate the implicit price ofeach of these characteristics.In non-market evaluation the method uses two types of markets:- property market- labour marketWith regard to the property market it is possible to describe any house e.g. by the number of rooms, location,structure, age, etc. The Hedonic pricing method should identify the contribution of each significant determinant ofhouse prices in order to estimate the marginal willingness-to-pay for each characteristic.Hedonic studies of the property market have been used to identify the value of non-market goods such as trafficnoise, aircraft noise, air pollution, water quality and proximity to landfill sites. A house near an airport, for example,will be purchased at a lower price than a house located in a quiet area. The difference in values can be viewed as thevalue attached to noise.In the labour markets the observation of wage differentials between jobs with different exposure to physical risk hasbeen used in order to estimate the value of avoiding risk of death or injury.Specific problems with this approach could be:- lack of information on households and a partly irrational behaviour;- multicollinearity: due to the fact that market characteristics tend to move in tandem, it is often hard to ‘tease out’the independent effect of the single characteristic.EXAMPLE OF THE USE OF A HEDONIC PRICE FOR THE ECONOMIC EVALUATION OF NOISEDue to the extention of an airport, the decibel B in the neighbouring area increases by 10 (so ΔB is assumed to equal to 10). Thesocial cost of the noise increase can be calculated with the following formula:C= ΔB x e x V x Lwhere L are the houses located in the area, V the average value and e as the value differentialTravel Cost methodThe travel cost approach seeks to put a value on the individuals’ willingness-to-pay for an environmental good orservice, like for instance a nature park or an archaeological area, by the costs incurred to consume it.The basis of the method is the observation that travel and nature parks, or archaeological areas, are complementssuch that the value of the nature park or archaeological area can be measured with reference to values expressed inthe markets for trips to those areas. For zones located far from the nature park the number of visits is zero becausethe cost of the trip exceeds the benefit derived from the trip.Therefore it is important to know:- the number of trips to the nature park over a given time period;- the costs of the trips to the nature park, from different zones split into the different components:♦ The monetary costs; in particular- travel costs,- admission price (if relevant),- on-site expenditures223