Per-Olov Johansson

Welfare Evaluations in Contingent Valuation Experiments with Discrete Response Data: Comment

In the case of private goods, individuals reveal their preferences in the market place. No similar market mechanism exists in the case of public goods. However, one obvious possibility is to ask people about their maximal willingness to pay for public goods or government expenditure (Johansson 1987, 1990, Miller). In some recent contingent market valuation studies people instead have been asked to accept or reject a specified amount of money for a change in the provision of a public good; different subsamples are confronted with different bids. The resulting yes and no responses usually are analyzed by logit or probit techniques (e.g., Johansson and Kristrom). This raises the question of how to compute the average willingness to pay when only yes and no responses are available. This point was advanced by Hanemann in his seminal 1984 paper on welfare evaluations with discrete responses; see also Hanemann (1987). However, we believe a minor imperfection in Hanemanns presentation may confuse and mislead practitioners. Hanemanns approach assumes that negative bids cannot occur but at the same time gives the impression that it also applies to models that allow for negative bids. We also extend Hanemanns discussion of the choice of money measure in cost-benefit analysis.

Willingness to pay measures and expectations: an experiment

In studies of the willingness to pay for various environmental commodities/services, it is typically explicitly or implicitly assumed that the respondent has perfect has perfect foresight. This paper, which is based on a questionnaire completed by examining if and how the value of a hunting permit is affected by the hunters expectations regarding the outcome of the hunting. In particular, the willingness to pay is estimated as a function of expected values as well as variances of different variables. Using a question which reflects an extension of Jensens inequality to the multivariate case, as well as measures of downside risk, it is shown that risk attitudes are important determinants of the willingness to pay for a hunting permit.

Cost-Benefit Analysis for Project Appraisal: Per-olov Johansson and Bengt Kriström

Written by two leading experts, this is a compact guide to the key tools and methods necessary to carry out cost-benefit analysis (CBA). The authors use modern economic tools to obtain general equilibrium cost-benefit rules that can be used to evaluate small projects, as well as large and even mega projects. Intertemporal issues like discounting, the shadow price of capital, and the treatment of risk are covered, and a state-of-the-art summary of available methods for the valuation of unpriced commodities is also included. In addition, the book provides detailed expositions of the marginal cost of public goods (MCPF), the marginal excess burden of taxes (MEB), and second-best evaluation rules, and shows how these concepts are interrelated. The importance of undertaking due diligence in evaluations is highlighted. This is an excellent toolkit for graduate students learning about the principles of CBA, and is a useful guide for government officials and policymakers.

Chapter 3 Valuing Public Goods in a Risky World: An Experiment

Publisher Summary This chapter presents preliminary results from an attempt to estimate willingness to pay measures for public goods in a risky world. Most of the results are consistent with the predictions generated by economic theory. For example, the willingness to pay is increasing in the number of saved species, which is the “public good” under consideration. According to the data, there is an interesting difference in risk attitudes between male and female respondents. The data set suggests that female respondents have risk aversion with respect to the considered public good. Male respondents, on the other hand, seem to have risk aversion only if many species become extinct while they are more inclined to accept risky outcomes if just a few species are threatened. There is also the possibility that respondents are unable to calculate ex ante compensating variation measures and therefore report some other money measure when the situation involves uncertain outcomes.

Chapter 4 Recreational Values, Pareto Optimality and Timber Supply

Publisher Summary This chapter presents results from the theory of Lindahl equilibria in economies with public goods to the multiple use management of public (and private) forest land. One can treat the environmental services of standing trees as public goods and know the general equilibrium prices for public goods; one can then decentralize the social optimization problem by adding an environmental component to the ordinary present value problem. One point being that this component is linear in the case of stand variables, and the problem that the valuation of one stand depends on the states of others is automatically solved by the general equilibrium prices. A very difficult and essentially unsolved practical problem is to find the pseudo-equilibrium prices. To highlight the economic problems created in a situation where agents derive utility from the environmental services produced by the forest, and from the commercial values obtained through the timber harvest, the chapter introduces a very simple general equilibrium model.

Disequilibrium cost-benefit rules for natural resources

Abstract This paper derives cost-benefit rules to be used when evaluating the efficiency gains from extraction of non-renewable resources. The interest is concentrated on consequences of market imbalances. Both excess supply situations and excess demand situations are considered. To derive the shadow pricing rules the paper develops an intertemporal multi-sector model of an open economy which is making use of natural resources. It turns out that the existing partial equilibrium rules or, for that matter, general disequilibrium rules derived for ordinary produced goods are not applicable. The intertemporal interactions, which may be (or at least are) ignored when deriving rules for ordinary produced goods, are of vital importance for the shadow prices to be used when evaluating the efficiency gains of increased extraction. Of particular interest seems to be the fact that the level of unemployment in many cases turns out to be of no importance for extraction decisions based on welfare considerations (even if full employment is expected to prevail in the future). Moreover, increased extraction in a period characterized by excess demand (or excess supply) in the market for a natural resource may be socially unprofitable.