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Lecture 5
Outline
1. Project Evaluation
2. The Need for Values of Non-Market Goods
• Cost benefit analysis
• Concepts of economic value
3. Valuation Technique: Contingent Valuation
• Survey evidence
4. Valuation Technique: Inference from Market Behaviour
• Travel Costs method
• Avertive behavior
• Hedonic Pricing
Valuation of a Private Project
R0 + R1 + R2 + R3 + ?????????????????????
Step 2: Add them up!
You have to remember that money tomorrow is worth less
than money today.
If I invest £100 today I get back £100 x (1.02) = £102 next
year if the interest rate is 2%.
Thus £102 in a year’s time is worth £102/1.02 = £100 today
PDV = R0 + R1 + R2 + R3 +
(1+r)1 (1+r)2 (1+r)3
Decision Rule
PDV >0
Or NPV>0
Basically need to do the same thing for
Public Projects but…
1. Many more costs and benefits – need to find them all not
just how they affect a company.
Building a Road
Costs:
Materials 100m in first year.
Labour 15m in first year.
Maintenance 10m per year.
Benefits
Driving time saved: 500,000 hours per year.
Lives Saved: 5 lives per year.
y*(1.05)/.05>325m!
Cost Benefit Analysis
This is the name for evaluation techniques for public
projects.
Non-Use Values
1. Bequest Values: Value of passing assets on
2. Existence Value: Knowledge of continued existence.
Contingent Valuation
Direct survey evidence on individual’s stated valuations.
Notes:
1. Similar tools used for market research, but market
research can be checked against future behaviour.
2. Evidence of use and non-use values.
3. Controversial in US as it was used in Exxon Valdez suit.
4. NOAA panel has issued guidelines on its use.
Contingent Valuation Formats
WTP – What is the most you are willing to pay for 5 days
without air pollution?
WTA – How much would compensate you for ….?
Risk premium?