Buzzard Lake Oil Spill

You have been hired by Megabux Consulting, Inc. to do an environmental damage assessment of a major oil spill in Buzzard Lake. There are 12 small towns in the area, at various distances from Buzzard Lake; these are largely summer communities. The spill has closed the lake to fishing and swimming for one year.   Your task is to quantify two categories of economic damage caused by this spill, as reflected in the reduced numbers of recreational day trips to the lake, and reduced rental values for houses near the lake.

1. Develop a travel-cost demand model for day trips to the lake. Use MS-Excel's or some other regression utility to estimate visitation rates as a function of trip cost, using some appropriate transform to linearize the relationship between visitation rate and cost. Then calculate predicted total visitation under successive increments in trip costs. Plot the aggregate demand schedule for site access, and calculate the consumer surplus loss resulting from a one-year closure of the lake.

Daily lake visitation data were collected from a survey of visitors conducted by the county recreation department the previous year. The 65 cents/mile cost of travel includes the implicit cost of trip time as well as fuel, vehicle depreciation, etc.  Assume Buzzard Lake has a 120 day recreation season and there is never any significant congestion at the lake that discourages visitors from coming.

2. Develop a hedonic analysis of housing prices as influenced by proximity to the lake. Treating property values as capitalized rents, determine how proximity to the lake enhances rental values.  Then calculate the aggregate loss of rental value in the 12-town area resulting from a one-year closure of the lake.

Use averages of recent sale prices by town as a proxy for average house values. Use a discount rate of 0.06 to infer average annual rental values for each town. Assume 2.5 people per household for all towns. Assume occupancy rates and other socioeconomic characteristics are identical across the 12 towns.

Now calculate the combined economic costs of the spill by summing the consumer surplus loss from the travel-cost analysis and the rental value loss from the hedonic price analysis.

The challenge in this project is to make the best of the data you have.  Explain any further assumptions you need for your analysis. Try to explain your procedures as clearly as possible so that even non-economists can follow your logic and trust your results.  POP=town's population; VIS/DAY=previous summer average lake visits/day from the town; DIST=distance in miles from center of town to nearest lake access point; AVGHSPR=average market value of houses ($) in the town, AVGHSSZ=average house size (square feet). Total visits per day averaged 2,388 before the spill.  Travel cost/mile= $0.65.

TOWN              POP VIS/DAY   DIST AVGHSPR AVGHSSZ
 
Arrow            1255     232    0.5   88458    1105
Buchanan         3008     385    2.0   79830    1015
Clawson          1104      89    2.5   84141    1250
Deaton           4621     386    4.5   78757    1165
Edgeworth       14905    1045    5.0   85540    1255
Friedman          452      21    6.5   79131    1215
Griliches        2122      54    7.0   82713    1360
Hotelling        1660      52    8.0   81867    1145
Intrilligator     688       8    8.0   79182    1210
Johnson          2932      66   10.0   85248    1325
Keynes           1894      26   12.0   76095    1180
Lespeyres        8174      24   12.5   80066    1195

Revised 11/14/2007