public goods and externalities - london school of...
Post on 21-Jun-2020
2 Views
Preview:
TRANSCRIPT
Public Goods and Externalities
Chew Khai Yen
March 19, 2018
Chew Khai Yen Public Goods and Externalities March 19, 2018 1 / 21
Part (a)
Evaluate available methods for eliciting peoples’ valuation of externalitiesand public goods.
Chew Khai Yen Public Goods and Externalities March 19, 2018 2 / 21
Valuation
Direct valuation: contingent valuation surveys on willingness-to-payfor public goods
Indirect valuation: happiness data
Chew Khai Yen Public Goods and Externalities March 19, 2018 3 / 21
What are CV survey responses measuring?
True economic preferences (i.e. true valuation of WTP)
Casual cost-benefit analysis
”Warm glow”
Attitude towards a public good expressed on a dollar scale
Reaction towards actions that have been taken (e.g. cleaning up anoil spill)
Chew Khai Yen Public Goods and Externalities March 19, 2018 4 / 21
Contingent Valuation (Diamond and Hausman, 1994)
Criteria to evaluate contingent valuation surveys:
Credibility - whether survey respondents are answering the questionbeing asked
Reliability - size and direction of the biases that may be present in theanswers
Precision - variability in responses (can usually be increased by simplyincreasing sample size)
Chew Khai Yen Public Goods and Externalities March 19, 2018 5 / 21
Credibility of CVS
Eliminate incredible responses that are unreasonably large / ”protestzeroes”
Verbal protocol analysis
respondents are asked to ”think aloud” as they respond to a surveytranscripts show the inherent difficulty in selecting a willingness-to-payresponse and the extent to which people refer to elements that oughtto be irrelevant to evaluating their own preferencesfindings strongly suggest that people are not easily in touch withunderlying preferences about the type of commodity asked about
Patterns of willingness-to-pay responses across individuals and acrosssurveys
Variation in WTP across individuals (income, preferences, etc.) nothelpful in distinguishing among the various hypotheses since theyroughly move in the same direction
Chew Khai Yen Public Goods and Externalities March 19, 2018 6 / 21
Variation in WTP Across Surveys
Multiple questions - should not matter whether the question is askedby itself, or with other questions - ordering should not matter too
Tolley et al. (1983) - WTP to preserve visibility at the Grand Canyon5x higher when this was the only question askedSamples and Hollyer (1990) - Seal value tended to be lower when askedafter whale value, while whale value was not affected by the sequenceof questions
Chew Khai Yen Public Goods and Externalities March 19, 2018 7 / 21
Variation in WTP Across Surveys
Single questions and the embedding effect
One group asked to evaluate X, another Y, and another X + YWTP for X + Y tends to be considerably less than the sum of WTPfor X and WTP for Y (adding up test)Diamond et al. (1993) found that stated WTP to preserve 1, 2, and 3wilderness areas are roughly the sameSimilar findings by Desvousges et al. (1993) in solving a problem ofkilling 2000, 20,000 and 200,000 birdsSchulze et al. (1993) find that a majority of respondents recognise anembedding effect in their own responses when asked for WTP forcleanup of a contaminated site
Chew Khai Yen Public Goods and Externalities March 19, 2018 8 / 21
Reliability of CVS
It is common to calibrate responses to surveys about behaviour (e.g.marketing surveys) due to systemic bias
How this calibration should be extended to the public good context isunclear
Lack of study of appropriate calibration factors
Meta-analysis of 28 studies by Murphy et al. (2005) found that 70%of the calibration factors are below 2 (with severe positive skewness)
Chew Khai Yen Public Goods and Externalities March 19, 2018 9 / 21
Diamond and Hausman’s Conclusion
Stated WTP from CVS are not measures of nonuse preferences overenvironmental amenities
Welfare analysis by treating the responses as if they were a measureof nonuse preference would not be a guide to good policy
”Some number is better than no number” fallacy
Chew Khai Yen Public Goods and Externalities March 19, 2018 10 / 21
Happiness Data (Levinson, 2012)
Question in General Social Servey which asks, ”Taken all together,how would you say things are these days? Would you say that you arevery happy, pretty happy, or not too happy?”
Responses linked to county in which respondents were surveyed andthe air quality in that location on that day
Fixed effects regression with household demographics as controls
Chew Khai Yen Public Goods and Externalities March 19, 2018 11 / 21
Results
Hijt = αPjt + γlnYi + X ′ijtβ + δj + ηt + δj × yeart + εijt
Happiness is related ”in sensible ways” to daily local air pollution
Estimate MRS between pollution and income to implicitly calculateWTP for improved air quality
MRS = ∂Y∂P
∣∣∣∣dH=0
= −Y α̂γ̂
Found that people are willing to pay roughly $35 for an improvementof one SD in air quality for one day
Chew Khai Yen Public Goods and Externalities March 19, 2018 12 / 21
Evaluation
Advantages
Free from sorting biases (eliminated by fixed effects and interactions)Not susceptible to strategic biases and framing problems of CVSServes as a complement to existing approachesShows that subjective well-being captures something meaningful aboutpeople’s circumstances
Issues
Treats happiness as a proxy for utility and makes interpersonalcomparisons”These days” is vague - months? years?Is income endogenous wrt to happiness?Study was feasible only due to well-monitored and extensive pollutiondata
Chew Khai Yen Public Goods and Externalities March 19, 2018 13 / 21
Part (b)
Using a supply-demand diagram explain how to interpret the implieddead-weight loss arising from (i) consumption externalities (ii) productionexternalities.
Chew Khai Yen Public Goods and Externalities March 19, 2018 14 / 21
Consumption Externalities
Positive Externality Negative Externality
Chew Khai Yen Public Goods and Externalities March 19, 2018 15 / 21
Production Externalities
Positive Externality Negative Externality
Chew Khai Yen Public Goods and Externalities March 19, 2018 16 / 21
Part (c)
Consider the pollution externality from the production of cars, but assumethat the externality damage is uncertain. Illustrate the ex post welfare lossfrom a tax policy that is based on the expected damage. Do the same fora policy that regulates car production based on the expected damage.Which policy seems better when the demand become more price-inelastic?
Chew Khai Yen Public Goods and Externalities March 19, 2018 17 / 21
Setup
Negative consumption externalityTwo realisationsPolicy set before externality is ”realised”
Chew Khai Yen Public Goods and Externalities March 19, 2018 18 / 21
Prices vs. Quantities (Weitzman 1974)
Taxation Quotas
Chew Khai Yen Public Goods and Externalities March 19, 2018 19 / 21
Price-inelastic demand - prefer taxes
High PED Low PED
Chew Khai Yen Public Goods and Externalities March 19, 2018 20 / 21
References
Diamond, P. & Hausman, J. (1994). Contingent Valuation: Is SomeNumber Better than No Number? Journal of Economic Perspectives,8(4), 45-64.
Levinson, A. (2012). Valuing public goods using happiness data: Thecase of air quality. Journal of Public Economics, 96(9-10), 869-880.
Murphy, J., Allen, J., Stevens, P., & Weatherhead, G. (2005). AMeta-analysis of Hypothetical Bias in Stated Preference Valuation.Environmental and Resource Economics, 30(3), 313-325.
Weitzman, M. (1974). Prices vs. Quantities. The Review ofEconomic Studies, 41(4), 477-491.
Chew Khai Yen Public Goods and Externalities March 19, 2018 21 / 21
top related