We have already treated situations where changes in the level of
an environmental amenity (Q) have no discernible impacts on market behaviors;
in these cases we must use non-market valuation procedures to measure the
economic benefits associated with those amenities (contingent valuation,
et al.). But there are many situations where changes in Q will affect
market behavior.
In the two following lectures we discuss two important valuation methods
in detail: hedonic
pricing and recreation
travel-cost. Before getting to these, we extend some basic concepts:
Household production models
It may be useful to adopt the fiction that people combine market goods X with Q as inputs to produce some "household product" Z, where utility is a function of Z, and only indirectly (through Z) a function of X and Q This household production model lets us develop a derived demand for Q, analogous to a cost-minimizing producer's derived demand for a production input. For example, a fisherman combines "inputs" X (fishing tackle, bait, gasoline, etc.) and Q (water quality at the fishing site) to "produce" some level of catch on a fishing trip. Since any efficient "producer" uses inputs X and Q where
MPP(X)/P(X) = MPP(Q)/WTP(Q),we can (theoretically) determine
WTP(Q) = P(X)MPP(Q)/MPP(X).Think through the implications of this. If X and Q are perfect substitutes, the ratio MPP(Q)/MPP(X) is constant so WTP(Q) varies proportionally with P(X). For example, WTP for potability of tapwater mainly varies with the price of water filters or bottled water. But if and Q are complements, the ratio MPP(Q)/MPP(X) varies with the relative quantities of X and Q. If X and Q are perfect complements, this conceptual framework leaves WTP(Q) undefined.
The household production model provides a general theoretical framework for analyzing the effects of variations in Q on residential housing values, relative wage rates in labor markets, recreation expenditures, etc.
Content Analysis
Even strictly non-market environmental goods such as the existence value of Monarch butterflies may in fact leave at least some discernible market trace. For example, some economists have experimented with content analysis of various media, attempting to infer valuation estimates for various environmental amenities based on the frequency with which these topics appear in print media, radio or TV news, or on the web. Web search engines are particularly efficient at counting occurrences of specific terms or phrases in the universe of web pages.
The economic theory of content analysis is still pretty rudimentary. The fact that a consumer buys a newspaper or watches a TV news show with a story about some environmental problem suggests some level of concern for that problem. Newspapers and networks select news stories to maximize readership or viewers, and firms pay to have their advertisements inserted between these news stories. So if CBS charges $240,000/minute for commericials on the nightly news with Dan Rather, a 40-second story on whooping cranes watched by the same audience of, say, 16 million, is worth $160,000, or $0.01 per viewer. Presumably the whooping cranes themselves are worth at least as much as this information about them. Viewer willingness-to-pay for this news is presumably higher.
Content analysis is supposed to index social concern for various issues. The approach is problematic because media attention to issues is notoriously fickle and reactive. The crash of a commercial jet makes headline news because it is rare and spectacular, so there is a lot of media coverage per life lost. In contrast, the daily slaughter of Americans on our highways is so mundane it often generates nothing but back-page stories from the police blotter or obituaries.