Cost benefit analysis L7 Valuations from observed behaviour · WTP and opportunity cost help in evaluating benefits and costs of a public policy . However, when markets don't exist, these may be difficult to observe · When market fails, market price is not equal to marginal social cost or marginal benefit · Idea: estimate price if market was efficient (shadow price) · Some approaches to obtain monetary estimates: 1. Revealed preference methods Market alternatives Hedonic prices Trade-off method Travel cost method 2. Stated preference methods Contingent valuation WTP - willingness to pay Cannot rely on market price when the market is distorted. Shadow price is estimate of true valuation Market analogy method . Many public goods or services are not directly traded on the market and do not have an explicit price e.g .: education, home care, housing, medical services, adoption services, etc. · Government services are free or highly subsidized . How to value the utility of the public good? . May have close substitutes that are traded . Price of market substitutes can be used as a proxy for consumers' WTP Related market - help evaluate. Goods they provide are also provided by the primary market. Ie: Gov provides services that are subsidised or for free, that can be also provided by the private sector. (medical services) Use private market information to find a demand curve. Linear estimation of demand curve. Selection issue - biased results, different consumer preferences for private and public. Hedonic Pricing method · Goods are valued for their underlying characteristics . Market price reflects the valuation for the intrinsic characteristics Price of product coming from intrinsic value of product. Fabric, brand and design etc. Electronic products such as Ipads; comparison of features. Hedonic Pricing function · Basic idea: An intangible good (for which there is no explicit market price) is one of a bundle of the characteristics of a good that is traded. For example, a house has characteristics associated with its location · Regression analysis of house prices conditioning on all other observable characteristics can help to isolate the implicit price of the intangible good
· p = f (x1, x2, · · · , xn) · To look at valuation of changes in xi (for which market may not exist), look at changes in p · ri = ap axi = af (x1,x2, ··· ,xn) axi · Hedonic price ri is the implicit price of attribute i P = price >> a function of the attributes that affect price. · To evaluate benefit of a scenic view, look at nearby house prices · p = f (DTC, SIZE, NBHD, VIEW , · · · ) · p = BODTC^ß1 SIZE ß2NBHD^ß3 VIEW^ß4 e^E · rv = ap /aVIEW = B4 p/VIEW Multiplicative form 2nd point Beta represents elasticities ; take log of both sides to get linear equation to get an estimate. Example · Valuing transport improvements through house prices . Take two identical houses, one is near a railway station and