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NEW A Preview of Chapter Six of my New Book READ HERE
The good news for you is that my book only has 16 chapters so pretty soon you won't be reading another preview of my Fundamentals of Environmental Economics book. Chapter Six is a vanilla chapter with a few twists. Given that the environment represent a set of public non-market goods, many environmental economists spend their lives devising clever ways to figure out how much do people value such goods. We can only judge the benefits of environmental regulation if we have some idea about how much different individuals value pollution reduction.Similar to other standard texts, I discuss hedonic real estate examples and contingent valuation. Unlike other texts, I actually teach the reader some basic econometrics to show how estimates of a home price hedonic provide tight bounds on a household's willingness to pay for non-market public goods.
But, then the chapter gets exciting. I introduce Harry the Hippo.
"In academic economics, a growing number of empirical papers use what is called a “field experiment” design in order to test hypotheses. In this section, I explain in detail how to conduct such a study and provide a relevant application for young environmental economists. The point of this example is to teach students how to estimate demand curves and how to learn about people’s willingness to pay for environmental goods.
Suppose that there is a zoo in Los Angeles. The zoo is home to a single creature called Harry the Hippo. The zoo spends $9000 dollars a year to feed and protect Harry. The zoo has no sources of revenue and has no benefactors or government support. If the zoo collects less than $9000 each year in tickets to see Harry then the zoo will close. The zoo hires an economist named Kahn to help them figure out what is the demand curve for visiting Harry. Kahn tells them that from the Law of Demand he knows that the demand curve slopes down for seeing Harry. In English, this means that if the Zoo charges more for a ticket to see Harry that fewer people will show up. Kahn tells the zoo that while he knows the sign of the slope of the demand function (it has a negative slope with respect to price) he does not know the demand curve’s intercept (i.e at what price per ticket would demand be zero) and he doesn’t know the slope of the demand curve. Kahn’s ignorance annoys the zoo keeper who is about to fire Kahn, when Kahn mentions that while he doesn’t know the shape of the Los Angeles Harry the Hippo demand curve, he has an idea for how collect the data to estimate this demand curve. The Zoo Keeper tells Kahn to go ahead and run his field experiment. Permit me now to tell you my experimental design."
I show how to use a randomized zoo ticket price design to estimate an aggregate demand curve and then I use this demand curve to solve for the revenue maximizing ticket price. I calculate the consumer surplus zoo attendees will gain. So, unlike most books I've seen I integrate consumer theory, environmental economics and field experiments and basic statistics into one 5 page example. Not bad for a $2 book?
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