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Homework 3: AEC 434 1) (From Chapter 14)  Consider a government training program that provides low-skilled men job-specific training

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Homework 3: AEC 434

1) (From Chapter 14)  Consider a government training program that provides low-skilled men job-specific training. To evaluate this program, members of the target population were randomly assigned either to a treatment group that was eligible to receive services under the program or to a comparison group that was not. Using this evaluation design, the following information was obtained:

• Members of the treatment group were found to remain in the program an average of one year, during which time they received no earnings, but were paid a tax-free stipend of $4,000 by the program to help them cover their living expenses. During the program year, the average annual earnings of members of the control group were $10,000, on which they paid taxes of $1,000. During the program year, the welfare and unemployment compensation benefits received by the two groups were virtually identical.

• Program operating costs (not counting the stipend) and the cost of services provided by the program were $3,000 per trainee.

• During the two years after leaving the program, the average annual earnings of members of the treatment group were $20,000, on which they paid taxes of $2,000. During the same period, the average annual earnings of members of the control group were $15,000, on which they paid taxes of $1,500.

• During the two years after leaving the program, the average annual welfare payments and unemployment compensation benefits received by members of the treatment group were $250. During the same period, the average annual welfare payments and unemployment compensation benefits received by members of the control group were $1,250.

 

Using a 5 percent discount rate and a five-year time horizon, compute the present value of the net gain (or loss) from the program from the trainee, nonparticipant, and social perspectives. In doing this, ignore program impacts on leisure and assume that all benefits and costs accrue at the end of the year in which they occur.

 

 

2. (From Chapter 15) Happy Valley is the only available camping area in Rural County. It is owned by the county, which allows free access to campers. Almost all visitors to Happy Valley come from the six towns in the county. Rural County is considering leasing Happy Valley for logging, which would require that it be closed to campers. Before approving the lease, the county executive would like to know the magnitude of annual benefits that campers would forgo if Happy Valley were to be closed to the public.

An analyst for the county has collected data for a travel cost study to estimate the benefits of Happy Valley camping. On five randomly selected days, he recorded the license plates of vehicles parked overnight in the Happy Valley lot. (As the camping season is 100 days, he assumed that this would constitute a 5 percent sample.) With cooperation from the state motor vehicle department, he was able to find the town of residence of the owner of each vehicle. He also observed a sample of vehicles from which he estimated that each vehicle carried 3.2 persons (1.6 adults), on average. I have included in the problem set description an excel table containing this information.

In order to translate the distance traveled into an estimate of the cost campers faced in using Happy Valley, the analyst made the following assumptions. First, the average operating cost of vehicles is $0.36 per mile. Second, the average speed on county highways is 50 miles per hour. Third, the opportunity cost to adults of travel time is 40 percent of their wage rate; it is zero for children. Fourth, adult campers have the average county wage rate of $9.25 per hour.

The analyst has asked you to help him use this information to estimate the annual benefits accruing to Happy Valley campers. Specifically, assist with the following tasks:

1. Using the preceding information, calculate the travel cost of a vehicle visit (TC) from each of the towns.

 

2. For the six observations, do as you did in homework 1 and make a scatter plot with visit rate on the y-axis and travel cost per person on the x-axis. Fit a line to this data and report its slope.

 

3. You know that with the current free admission, the number of camping visits demanded is 14,160. Find additional points on the demand curve by predicting the reduction in the number of campers from each town as price is increased by $5 increments until demand falls to zero. This is done in three steps at each price: First, multiply the coefficient of TC from the regression by the actual TC for that town, and add the intercept term to it.  This is the predicted visit rate for each town. Second, multiply the predicted VR of each town by its population to get a predicted number of visitors. Third, sum the visitors from each town to get the total number of predicted visits.

 

4. Estimate the area under the demand curve as the annual benefits to campers.

3. The construction of a dam that would provide hydroelectric power would result in the loss of two streams: one that is now used for whitewater rafting; and another that does not support rafting but is part of a wilderness area.

a. Imagine that a contingent valuation method is used to estimate the social cost of the loss of each of these streams. Would you be equally confident in the two sets of estimates? Write your response in 150 words or less.

 

b. Consider two general approaches to asking contingent valuation questions about the streams. The first approach attempts to elicit how much compensation people would require to give up the streams. The second approach attempts to elicit how much people would be willing to pay to keep the streams. Which approach would you recommend? Why? Write your response in 200 words or less.