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Social Discount Rate

Travel Costs

Scott MatthewsCourses: 12-706 and 73-359Lecture 14 - 10/15/2003

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Admin Issues

Early Course EvalsHW #2 Overview, results (mean=42)Optional Friday recitations/project

review sessionsScheduling of Project Presentations

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Social Discount Rate

Discounting rooted in consumer preference

We tend to prefer current, rather than future, consumption Marginal rate of time preference (MRTP)

Face opportunity cost (of foregone interest) when we spend not save Marginal rate of investment return

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Intergenerational effects

We have tended to discuss only short term investment analyses (e.g. 5 yrs) What about effects in distant future? Called intergenerational effects

Economists agree that discounting should be done for public projects Do not agree on positive discount rate

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An example

Someone offers you choice of $1000 now and $1200 in one year If you have no preference (indifferent)

then your MRTP is 20%

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Discounting handout

How much do/should we care about people born after we die? Higher the discount rate, the less future

values will count compared to todayEthically, no one’s interests should

count more than another’s Implies there is no justification for

discounting across long time periods Called ‘equal standing’

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Climate Change

Discussions ongoing about how best to manage global CO2 emissions to limit effects of global change

Should we sacrifice short-run economic growth to do something to improve environment and leave resources for the future? Really asking 2 separate questions!

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Two Questions

What duty do we have to make sacrifices for future generations?

If we sacrifice, what is the optimal policy to maximize benefit? So we should compare global change

proposals with alternatives Perhaps higher R&D spending on science

or medicing would have higher benefits!

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Hume’s Law

Thus discounting issues are normative vs. positive battles

Hume noted that facts alone cannot tell us what we should do Any recommendation embodies ethics

and judgment E.g. focusing on ‘highest NPV’ implies

net benefits is only goal for society

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Some evidence

Cropper et al surveyed 3000 homes Asked about saving lives in the future Found a 4% discount rate for lives 100

years per nowEqual standing does not imply different

generations have equal claims to present resources! Harsanyi says only do so if their marginal

gain is higher than our loss

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More evidence

If future generations will be better off than us anyway Then we might have no reason to make additional

sacrificesThere might be ‘special standing’ in addition

to ‘equal standing’ Immediate relatives vs. distant relatives Different discount rates over time Why do we care so much about future and ignore

some present needs (poverty)

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Travel Costs

Time is a valuable commodity (time is $)Most major transportation/infrastructure

projects built to ‘save travel costs’ Need to tradeoff project costs with benefits Ex: new highway that shortens commutes

Differences between ‘travel’ and ‘waiting’ Waiting time disutility might be orders of

magnitude higher than just ‘travel disutility’ Why? Travelling itself might be fun

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Valuation: Travel Cost Method

Estimate economic use values associated with ecosystems or sites that are used for recreation changes in access costs for a recreational site elimination of an existing recreational site addition of a new recreational site changes in environmental quality

www.ecosystemvaluation.org/travel_costs.htm

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Travel Cost Method

Basic premise - time and travel cost expenses incurred to visit a site represent the “price” of access to the site. 

Thus, peoples’ WTP to visit the site can be estimated based on the number of trips that they make at different travel costs.  This is analogous to estimating peoples’ WTP

for a marketed good based on the quantity demanded at different prices.

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Example Case

A site used mainly for recreational fishing is threatened by development. 

Pollution and other impacts from this development could destroy the fish habitat Resulting in a serious decline in, or total loss of,

the site’s ability to provide recreational fishing services. 

Resource agency staff want to determine the value of programs or actions to protect fish habitat at the site.

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Why Use Travel Cost?

Site is primarily valuable to people as a recreational site.  There are no endangered species or other highly unique qualities that would make non-use values for the site significant.

The expenditures for projects to protect the site are relatively low.  Thus, using a relatively inexpensive method like travel cost makes the most sense.

Relatively simple compared to other methods

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Options for Method

A simple zonal travel cost approach, using mostly secondary data, with some simple data collected from visitors.

An individual travel cost approach, using a more detailed survey of visitors.

A random utility approach using survey and other data, and more complicated statistical techniques.

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Zonal Method

Simplest approach, estimates a value for recreational services of the site as a whole. 

Collect info. on number of visits to site from different distances.  Calculate number of visits “purchased” at different “prices.” 

Used to construct demand function  for site, estimate consumer surplus for recreational services of the site.

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Zonal Method Steps

1. define set of zones around site.  May be defined by concentric circles around the site, or by geographic divisions, such as metropolitan areas or counties surrounding the site

2. collect info. on number of visitors from each zone, and the number of visits made in the last year. 

3. calculate the visitation rates per 1000 population in each zone.  This is simply the total visits per year from the zone, divided by the zone’s population in thousands. 

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Sample Data

 Zone Total

Visits/YearZone

PopulationVisits/1000

0 400 1000 4001 400 2000 2002 400 4000 1003 400 8000 50

Beyond 3 0Total Visits 1600

   

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Estimating Costs

4. calculate average round-trip travel distance and travel time to site for each zone.  Assume Zone 0 has zero travel distance and time.  Use average cost per mile and per hour of travel time, to calculate travel cost per trip.  Standard cost per mile is $0.30.  The cost of time is from average hourly wage.  Assume that it is $9/hour, or $0.15/minute, for all zones, although in practice it is likely to differ by zone. 

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Data

Zone RoundTripDist.

RoundTrip Time

Distancetimes

Cost/Mile($.30)

TravelTimetimesCost/

Minute($.15)

TotalTravelCost/Trip

0 0 0 0 0 01 20 30 $6 $4.50 $10.502 40 60 $12 $9.00 $21.003 80 120 $24 $18.00 $42.00

5. Use regression to find relationship between visits and travel costs,e.g. Visits/1000 = 330 – 7.755*(Travel Cost)

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Final steps 6. construct demand for visits with regression. First point on demand

curve is total visitors to site at current costs (with no entry fee), which is 1600 visits.  Other points by estimating number of visitors with different hypothetical entrance fees (assuming that an entrance fee is valued same as travel costs).  Start with $10 entrance fee.  Plugging this into the estimated regression equation, V = 330 – 7.755C:

Zone Travel Costplus $10

Visits/1000 Population Total Visits

0 $10 252 1000 2521 $20.50 171 2000 3422 $31.00 90 4000 3603 $52.00 0 8000 0

Total Visits 954

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Demand curve

This gives the second point on the demand curve—954 visits at an entry fee of $10.  In the same way, the number of visits for increasing entry fees can be calculated:

Entry Fee Total Visits$20 409$30 129$40 20$50 0

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Graph

Consumer surplus = area under demand curve = benefits from recreational uses of site around $23,000 per year, or around $14.38 per visit ($23,000/1,600). 

Agency’s objective was to decide feasibility to spend money to protect this site.  If actions cost less than $23,000 per year, the cost will be less than the benefits provided by the site.

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Value - travel time savings

Many studies seek to estimate VTTS Can then be used easily in CBAs

Book reminds us of Waters 1993 (56 studies) Many different methods used in studies Route, speed, mode, location choices Mean value of 48% of wage rate (median 40) North America: 59%/42%

Miller (1989): 60% drivers, 40% passengers 90% drivers/60% passengers in congested areas

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Monetary studies

NCHRP 2-18 (1995): National Cooperative Highway Research Program Stated preference survey method $15,000 income => $2.64/hour VTTS $55,000 @ $5.34/hour $95,000 @ $8.05/hour (decreasing)

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Government Analyses

Again, travel versus leisure important Wide variation: 1:1 to 5:1!

Income levels are important themselves VTTS not purely proportional to income Waters suggests ‘square root’ relation E.g. if income increases factor 4, VTTS by 2

Typically 40-60% of hourly rate in CBAsUS DOT: 50% of wage rate - local travel

70% of wage for intercity personal travel 100% of wage (plus fringe) - intercity business

travel

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Recreation Benefits

Value of recreation studies‘Values per trip’ -> ‘value per activity day’Activity day results (Sorg and Loomis 84)

Sport fishing: $25-$100, hunting $20-$130 Camping $5-$25, Skiing $25, Boating $6-$40 Wilderness recreation $13-$75

Are there issues behind these results?