Revealed Preference Method

Travel Cost Method (TCM)

The TCM is based on a comparatively simple logic. If a person incurs a cost $20 for going to a reservoir to enjoy its beauty, then it is assumed that the benefit to the person from the scenic beauty of the reservoir is equal to or more than $20. The cost would be comprised of the costs of a taxi or own car and the opportunity cost of the time spent in commuting and roaming around the reservoir (any admission fees would be added to the cost). Beyond a certain distance people would not commute as the cost incurred would become more than the value of the scenic beauty derived.

A statistical relationship between observed visits and the cost of visits is derived and used as a proxy demand curve from which consumers’ surplus per visit can be measured. This method, thus involves collection of data on visits to a site from different locations and the costs of visiting from each place. This data can be obtained by means of a survey of reservoir visitors. Respondents would be asked to indicate the time and money they spent travelling to the reservoir, distance to the site and information about other socio-economic variables. One can then derive a visit rate per capita as a function of travel costs; obviously visits per capita would fall as travel costs rise.

The existence of other (substitute) sites would affect the outcome. Hence the TCM should take such substitutes into account. Another problem associated with the TCM relates to multi-purpose trips.

 

Hedonic Pricing

This method can be used to establish the monetary value of such items as noise, flood risk, air quality etc. We know that a house or land near a noisy place, such as an airport or a railway track, or a house which is exposed to the risk of frequent flooding commands less value than an exactly similar house located in different and better surroundings. In order to estimate how the value of a house is affected by the risk of flooding, it would be necessary to collect information on sale prices of houses with different degrees of flooding, including zero flooding, along with other characteristics of similar houses (such as number of rooms, type of structure, availability of other facilities and quality etc.). Thereafter, a statistical or econometric analysis can be conducted to establish a relationship between extent of flooding and decrease in sale price assuming everything else stays the same. In this manner, the adverse effect of flood on house or land values can be estimated.

 

Marketed Goods as Substitutes

Sometimes, the price of a privately marketed good (e.g. a private park) can be used as a measure of value of an unpriced public good (e.g. a public park). Similarly, the price charged by a private company for supply of water may be used to determine the value of unpriced or free water supplied by nature or by government. This method can be applied without much difficulty if the private and public goods are similar or are perfect substitutes. Such cases, however, are very few.


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