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Volume IV, Studies on Partial Equilibrium Approaches to Valuation of Environmental Amenities EPA-600/5-79-001D February 1979

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Volume IV, Studies on Partial Equilibrium Approaches to Valuation of Environmental Amenities EPA-600/5-79-001D February 1979 Environmental Protection Ecological Effects February 1979 Agency Washington DC 20460 Research Development EPA Methods Development for Assessing Air Pollution Control Benefits Volume IV, Studies on Partial Equilibrium Approaches to Valuation of Environmental Amenities EPA-600/5-79-001d February 1979 METHODS DEVELOPMENT FOR ASSESSING AIR POLLUTION CONTROL BENEFITS Volume IV Studies on Partial Equilibrium Approaches to Valuation of Environmental Amenities by Maureen L. Cropper, William R. Porter and Berton J. Hansen University of California Riverside, California 92502 Robert A. Jones and John G. Riley University of California Los Angeles, California 90024 USEPA Grant #R805059010 Project Officer Dr. Alan Carlin Office of Health and Ecological Effects Office of Research and Development U.S. Environmental Protection Agency Washington, D.C. 20460 OFFICE OF HEALTH AND ECOLOGICAL EFFECTS OFFICE OF RESEARCH AND DEVELOPMENT U.S. ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, D.C. 20460 OTHER VOLUMES OF THIS STUDY Volume I, Experiments in the Economics of Air Pollution Epidemiology, EPA-600/5-79-001a. This volume employs the analytical and empirical methods of economics to develop hypotheses on disease etiologies and to value labor productivity and consumer losses due to air pollution-induced mortality and morbidity. Volume II, Experiments in Valuing Non-Market Goods: A Case Study of Alternative Benefit Measures of Air Pollution Control in the South Coast Air Basin of Southern California, EPA-600/5-79-001b. This volume includes the empirical results obtained from two experiments to measure the health and aesthetic benefits of air pollution control in the South Coast Air Basin of Southern California. Volume III, A Preliminary Assessment of Air Pollution Damages for Selected Crops within Southern California, EPA-600/5-79-001c. This volume investigates the economic benefits that would accrue from reductions in oxidant/ozone air pollution-induced damages to 14 annual vegetable and field crops in southern California. Volume V, Executive Summary, EPA-600/5-79-001e. This volume provides a 23 page summary of the findings of the first four volumes of the study. This document is available to the public through the National Technical Information Service, Springfield, Virginia 22161. DISCLAIMER This report has been reviewed by the Office of Health and Ecological Effects, Office of Research and Development, U.S. Environmental Protection Agency, and approved for publication. Approval does not signify that the contents necessarily reflect the views and policies of the U.S. Environmental Protection Agency, nor does mention of trade names or commercial products constitute endorsement or recommendation for use. ii PREFACE The research studies presented in this volume emphasize some factors that are not completely treated in previous volumes. Most of the indepen- dent studies presented here tend to qualify the results of the experimental procedures set forth in earlier volumes. Each of them is therefore worthy of detailed attention. iii ABSTRACT The research presented in this volume explores various facets of the two central project objectives (the development of new experimental tech- niques for measuring the value of impovements in environmental amenities; the use of microeconomic methods to develop hypotheses on disease etiologies, and to value labor productivity and consumer losses due to air pollution- induced mortality and morbidity that have not been given adequate attention in the previous volumes. The valuations developed in these volumes have all been based on a partial equilibrium framework. W.R. Porter considers the adjustments and changes in underlying assumptions these values would require if they were to be derived in a general equilibrium framework. In a second purely theoretical paper, Robert Jones and John Riley examine the impact upon the aforementioned partial equilibrium valuations under variation in consumer uncertainty about the health hazards associated with various forms of consumption. Two empirical efforts conclude the volume. M.L. Cropper employs and empirically tests a new model of the variations in wages for assorted occupations across cities in order to establish an estimate of willingness to pay for environmental amenities. The valuation she obtains for a 30 percent reduction in air pollution concentrations accords very closely with the valuations reported in earlier volumes. The volume concludes with a report of a small experiment by W.R. Porter and B.J. Hansen intended to test a particular way to remove any biases that bidding game respondents have to distort their true valuations. All of these studies tend to qualify the results of the experimental procedures discussed in earlier volumes. Further research will require: (1) an adequate specification of the mobility decision in response to de- graced air quality; (2) consideration of relative price changes not directly related to air pollution as set forth in Chapter II and verified by Porter; and (3) how consumers evaluate a multitude of risks simultaneously, both in eating habits and pollution exposures where their economic and physical losses are uncertain. iv CONTENTS Abstract . ...* . iv Figures . vii Tables . viii Chapter I Introduction . 1 Chapter II Public Goods Decisions Within the Context of a General Competitive Economy ................ 2 2.1 Partial Equilibrium Procedure ............ 12 2.2 Bidding Procedure for a General Economy ....... 16 2.3 Conclusions ..................... 22 2.4 Recommendations ................... 22 Footnotes ...................... 24 References ..................... 25 Chapter III The Value of learning about Consumption Hazards . 26 3.1 The Value of Information . 26 3.2 Marshallian Analysis . 28 3.3 Logarithmic Utility Functions . 31 3.4 General Utility Functions . 33 3.5 The Value of Imperfect Information . 36 3.6 Information and Price Adjustment . 39 3.7 Information About Product Quality with Negative Social Value . 40 3.8 Urban Location and Land Values with Environmental Hazards . 43 3.9 Optimal Urban Location . 48 3.10 Uncertain Environmental Quality and the Prospect of Better Information . 51 3.11 Precautionary Response to the Prospect of Information 53 3.12 When Learning Prospects Do Not Affect Current Actions 54 3.13 Utility Affected by Accumulated Consumption . 55 Footnotes . 62 References . 63 Chapter IV The Valuation of Locational Amenities: An Alternative To the Hedonic Price Approach . 64 4.1 An Equilibrium Model of Urban Location . 65 4.2 Empirical Specification and Estimation of the Model . 72 v 4.3 Empirical Results . 75 4.4 Conclusion . 84 Chapter V Valuation Revealing Guesses: A Report on the Experimental Testing of a Non-Market Valuation . 86 5.1 Description of the Experiment-in-Guessing . 86 5.2 Incentive Structure of the Proposed Public Good Guessing Procedure . 91 vi FIGURES Number Page 2.1 The Non-Binding Bid ................... 19 3.1 The Value of Information ................. 30 3.2 Urban Location and Land Values .............. 45 3.3 Homothetic Preference Case ................ 46 3.4 Uncertainty and Better Information ............ 52 3.5 The Case of No Speculation ................ 52 vii TABLES Number Page 3.1 The Value of Perfect Information as a Percentage of Income ......................... 34 4.1 Estimated Labor Supply Functions ............. 76,77 4.2 Labor Supply Functions of Blue-Collar Workers ...... 80 4.3 Labor Supply Functions of White-Collar Workers ...... 81 4.4 Valuations of Environmental Amenities .......... 83 5.1 Selected Values of ................. 89 viii CHAPTER I INTRODUCTION TO VOLUME IV The research presented in this volume explores various facets of the two central project objectives (the development of new experimental tech- niques for measuring the value of improvements in environmental amenities; the use of microeconomic methods to develop hypotheses on disease etiologies, and to value labor productivity and consumer losses due to air pollution- induced mortality and morbidity that have not been given adequate attention in the previous volumes. The valuations developed in these volumes have all been based on a partial equilibrium framework. W.R. Porter considers the adjustments and changes in underlying assumptions these values would require if they were to be derived in a general equilibrium framework. In a second purely theoretical paper, Robert Jones and John Riley examine the impact upon the aforementioned partial equilibrium valuations under variations in consumer uncertainty about the health hazards associated with various forms of consumption. Two empirical efforts conclude the volume. M.L. Cropper employs and empirically tests a new model of the variations in wages for assorted occu- pations across cities in order to establish an estimate of willingness to pay for environmental amenities. The valuation she obtains for a 30 percent reduction in air pollution concentrations accords very closely with the val- uations reported in earlier volumes. The volume concludes with a report of a small experiment by W.R. Porter and B.J. Hansen intended to test a particular way to remove any biases that bidding game respondents have to distort their true valuations. All of these studies tend to qualify the results of the experimental procedures discussed in earlier volumes. Further research will require: (1) an adequate specification of the mobility decision in response to de- graded air quality; (2) consideration of relative price changes not directly related to air pollution as set forth
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