Estimates Of Welfare Losses Research Articles

Social desirability and the WTP–WTA disparity in common goods

This study explores the role of social desirability bias in the willingness to pay (WTP)–willingness to accept (WTA) disparity debate. In the context of a valuation scenario involving air quality in Athens, Greece, we examine whether the well-known WTP–WTA disparity is in place and whether social desirability could be related to this gap by introducing different magnitudes of bias on the two welfare measures. To do so, we contrast the results obtained from the contingent valuation method with those from the inferred valuation method that is believed to mitigate social desirability bias. On the policy side, the study shows that estimates of welfare loss associated with the Greek government’s decision to equalize the tax on diesel fuel and heating oil, which had serious side-effects on air quality, vary greatly with respect to the value measure and method of elicitation.

Do U.S. Anglers Care about Harmful Algal Blooms? A Discrete Choice Experiment of Lake Erie Recreational Anglers

AbstractDespite the growing awareness of harmful algal blooms (HABs) in the United States and abroad, estimates of welfare losses due to their presence are missing from the literature. Using a mail survey of 767 Ohio Lake Erie recreational angler respondents and a choice experiment, this study provides the first empirical quantification of the economic impacts of HABs on U.S. recreational anglers. Our results demonstrate a significant and substantial willingness to pay by anglers for reduction in HABs, beyond the benefits associated with conventional water quality measures such as catch rates and water clarity. For instance, we find that anglers are willing to pay $8 to $10 more per trip for one less mile of boating through HABs en route to a fishing site. This finding suggests that explicit measures of HABs need to be collected and considered when valuing water quality in nutrient‐rich bodies of water. We evaluate the welfare improvements resulting from several nutrient reduction policies, and find that anglers are willing to pay on average $40 to $60 per trip for a policy that cuts upstream phosphorus loadings by 40%. The majority of welfare gains for anglers result from improving the non‐catchable component of the fishing experience, notably water clarity and HAB reduction, as opposed to better chances of angler success.

Alternative representation of the deadweight loss triangle in oligopoly

PurposeThe purpose of this paper is to provide an alternative way of calculating the deadweight loss triangle in oligopolistic markets which takes inefficient use of inputs into account. The author shows that the result of the approach coincides with the one that exists in the economics literature. However, the author explicitly accounts for the inefficient use of inputs.Design/methodology/approachThe market supply curve that is extensively used for competitive markets has been reconsidered for the imperfectly competitive markets. The necessary condition for the efficient use of resources is investigated and a price level is derived at which the market output of oligopoly is produced efficiently. The degree of inefficient use of inputs is reported via the definitions of Input Inefficiency Measure (IIM) and the Ratio of Inefficient usage of Inputs to Total Deadweight Loss (RITD).FindingsThe author discovers that the area under the supply curve of the competitive market corresponds precisely to the minimum total costs of producing any given market output. To make this important finding operational in imperfectly competitive markets, the IIM reports the degree of distorted input allocation among firms with differentiated cost structures in producing a given equilibrium imperfectly competitive market output. In measuring the monopoly power, it is known that CRn or HHI market concentration indexes, which are calculated based on the market shares of firms regarding the demand side of the market, are widely used. The measures, which take into account of the distortions in input usage, and hence, the supply side may be considered as an additional index. For example, if the market demand were shared equally by two firms (no dominant firm with respect to the demand side), it is known that the leadership would still arise when the costs of firms differed as in the dominant firm model in favor of the lower cost producing firm.Research limitations/implicationsThe author recommends some more theoretical research extensions of the approach suggested here to other oligopolistic markets like the Cournot-Nash, the Stackelberg and other models. In all cases, there is a need for additional work to find some measurable variables in practice in order to estimate the input inefficiency given by the two measures and differentiate it from the inefficiency of units of outputs that are not produced.Practical implicationsIt may be interesting to decompose the various estimates of welfare losses due to monopoly power as a percentage of GNP that were discussed in the literature into two inefficiency components: units of outputs that are not produced and units of inputs that are misallocated among firms.Social implicationsThe government officials might be interested in assessing the degree of loss of input usage by firms in addition to output loss in oligopolistic markets summarized by the two inefficiency indexes. Law economists may be inspired in discussing the issue of input inefficiency in the context of on antitrust policy.Originality/valueThe author emphasized that the area under the market supply curve minimized the aggregate cost of producing a given total market output in competitive markets. Having recognized the importance of this finding, the author tried to apply it to imperfectly competitive markets and especially to the calculation of deadweight loss in such markets. The author showed that the total social cost could be calculated by including the input inefficiency which can be defined as the extra cost to society arising from not using the most appropriate economic resource allocation among firms in addition to the usual deadweight loss triangle. Moreover, the author had to introduce some more new terms like the market supply curve allocation, the adjusted competitive price, efficiency gain and so on, as they were necessary along the course of the analysis.

Valuing Water Supply Reliability with Sensitivity Analysis

The purpose of this paper is to calculate the expected reliability benefits of alternative water supplies that are less vulnerable to disruption than the current composition of supplies, especially those regions which rely on imported surface water. Expected reliability benefits are measured using estimates of welfare losses under various levels of supply disruption, the probability of each level disruption, and on consumption forecasts over the life of proposed alternative supplies. To consider uncertainty in reliability benefits, we run sensitivity analyses to value reliability under different discount rates, the elasticities of demand, water supply disruption levels, and corresponding probability distributions of disruption.

Impacts of climate change and ocean acidification on coral reef fisheries: An integrated ecological–economic model

Coral reefs are highly productive shallow marine habitats at risk of degradation due to CO2-mediated global ocean changes, including ocean acidification and rising sea temperature. Consequences of coral reef habitat loss are expected to include reduced reef fisheries production. To our knowledge, the welfare impact of reduced reef fish supply in commercial markets has not yet been studied. We develop a global model of annual demand for reef fish in regions with substantial coral reef area and use it to project potential consumer surplus losses given coral cover projections from a coupled climate, ocean, and coral biology simulation (CO2-COST). Under an illustrative high emission scenario (IPCC RCP 8.5), 92% of coral cover is lost by 2100. Policies reaching lower radiative forcing targets (e.g., IPCC RCP 6.0) may partially avoid habitat loss, thereby preserving an estimated $14 to $20 billion in consumer surplus through 2100 (2014$ USD, 3% discount). Avoided damages vary annually, are sensitive to biological assumptions, and appear highest when coral ecosystems have moderate adaptive capacity. These welfare loss estimates are the first to monetize ocean acidification impacts to commercial finfisheries and complement the existing estimates of economic impacts to shellfish and to coral reefs generally.

Estimation and application of a complete demand system for the United Arab Emirates

Purpose– The purpose of this paper is to estimate a complete demand system for the United Arab Emirates (UAE) and use the estimates to evaluate the welfare impact of price inflation. Eight expenditure groups are considered: food, clothing, housing, furniture, transportation, medical care, recreation, and miscellaneous.Design/methodology/approach– Household survey data are used to estimate the elasticities separately for Emiratis and expatriates by income quintile using seemingly unrelated regression within a Linear Expenditure System that accounts for demographic variables.Findings– Welfare loss is inversely related to income quintile and is lower for Emirati households. Transportation, housing, and food are the sources of the bulk of the welfare loss. The shares of the three consumption groups, combined with their respective inelastic demands, explain why they figure prominently as the leading sources of welfare loss when their prices rise.Originality/value– First ever demand system estimated for the UAE. Welfare loss estimates provide some rational basis on which examination may be made of existing UAE policies that effect commodity prices, like price controls, and policies currently being discussed, like commodity taxation, and their distributional effects.

Stepping Stones for Biological Invasion: A Bioeconomic Model of Transferable Risk

We investigate three sources of bias in valuation methods for ecosystem risk: failure to consider substitution possibilities between goods, failure to consider nonseparability of ecosystem services with market goods, and failure to consider substitution possibilities between ecosystems. The first two biases are known in the literature, and we offer insight on the size of the bias for a specific example. Our work on spatially transferable risk is novel. We develop the concept and show how it may undermine typical invasion prevention strategies. We find three key results. First, partial equilibrium estimates of welfare loss are significantly overestimated relative to general equilibrium estimates. If ecosystem services and market goods are substitutes the partial equilibrium bias is greater than if they are compliments. Second, well-intended policies do not necessarily reduce overall risk; risk reduction actions can transfer risk to another time or location, or both, which may increase total risk. Third, policies of quotas and inspections have to be extreme to improve welfare, with inspections having advantages over quotas.

Bootstrapping Your Fish or Fishing for Bootstraps? Precision of Welfare Loss Estimates from a Globally Concave Inverse Demand Model of Commercial Fish Landings in the U.S. Great Lakes

We extend Holt and Bishop's (2002) normalized quadratic inverse demand function by obtaining measures of precision of elasticities and consumer welfare loss estimates due to reductions in commercial landings in the U.S. Great Lakes. Even with curvature constraints imposed, confidence intervals are obtained by using the bootstrap, subsample bootstrap, and subsample jackknife.

The impact of institutional constraints on the Limarí River Valley water market

Institutional constraints on water and water rights trades are usually implemented to reduce the potential costs of free trade in water rights, but these constrains are themselves not without cost. Using data on permanent water rights and annual spot water transactions in the Limarí River Valley of northern Chile, we test for trade barrier‐induced price differences in the constrained permanent water rights market versus the unconstrained spot water market and then estimate the welfare losses generated as a result of these restrictions. We find that trade barriers in the permanent water rights market cause prices to diverge across adjacent irrigation districts for homogenous water rights despite the fact that prices equalize across irrigation districts in the unconstrained spot water market. The resulting estimates of welfare losses from these barriers in the permanent water rights market are found to be significant.

Impacts of Economic Reform in Poland: Incidence and Welfare Changes Within a Consistent Framework

The costs of shortages and rationing are not captured by standard consumer price indices. Thus the change in real GDP per capita is an overestimate of welfare losses in transition economics. In this study virtual prices are used to calculate new cost-of-living indices (CLIs). The results for Polant show that from 1987 to 1992 the CLI ignoring the rationing effects is biased upward from 1.53 to 3.71 percentage points per year. Compared to the estimates of welfare loss that neglect the rationing effects during the prereform period, the estimated welfare losses that reflect the rationing are reduced by 50% using Hausman' virtual prices and by 75% using external proxy virtual prices.

Spatial Variation in Risk Preferences Among Atlantic and Gulf of Mexico Pelagic Longline Fishermen

This paper shows the effects of spatially aggregating data in an analysis of fishing site choice among Atlantic and Gulf of Mexico longline fishers. Parameter estimates of expected utility, measures of risk, and estimates of welfare losses from area closures are presented. The estimated parameters and the measures of risk aversion indicate some spatial variation. However, the welfare measures from the area closure vary widely between a spatially aggregated model and a disaggregated model. The reason appears to arise from the economic behavior of fishers in New Jersey, where the expected utility model performs poorly.

A Comparison of Oligopoly Welfare Loss Estimates for U.S. Food Manufacturing: Comment

In the May 1995 issue of this journal, Peterson and Connor (P&C) presented a comparison of allocative efficiency losses from oligopoly power in U.S. food manufacturing industries. In the paper they address two questions: Were the SCP (structure-conduct-performance) crosssectional techniques of the 1960s and 1970s illconceived and made obsolete by the theoretical progress of the 1980s? and Were officials... misled by industrial studies that are now known to be special cases of more general models? (p. 306). Based on their tables 2 and 3, presenting fifteen food industries with the largest welfare losses under various scenarios and the

A Comparison of Oligopoly Welfare Loss Estimates for U.S. Food Manufacturing: Reply

A Comparison of Oligopoly Welfare Loss Estimates for U.S. Food Manufacturing: Reply

Consumer Welfare Loss Estimates for Differentiated Food Product Markets

The magnitude of static welfare losses associated with oligopoly market power in the U.S. food manufacturing industries is controversial. Having accurate estimates of these losses is important for the allocation of antitrust enforcement efforts. Parker and Connor, using two structure-conduct-performance (SCP) crosssectional models,' were among the first to estimate the magnitude of welfare losses for the U.S. food manufacturing industries. They estimated the deadweight consumer welfare loss (DWL) to be between 0.16 and 0.45 percent of the value of 1975 food industry shipments, and total consumer overcharge (the sum of the deadweight loss triangle plus the income transfer) to range between 7.9 percent and 11.5 percent of food shipments. While the SCP models have provided useful insights, a criticism of these models is that they are not derived from explicit theoretical models (Schmalensee). This criticism led researchers to develop new welfare loss formulas based on oligopoly models that incorporate explicit firm pricing rules (Dickson and Yu; Willner; Willner and Stahl). Until the late 1980s, mathematical tractability confined these models to considering only homogeneous goods. Connor and Peterson (1994) showed that the average deadweight loss estimate for U.S. food manufacturing using various oligopoly models ranged

WELFARE LOSS OF WETLANDS DISINTEGRATION: A LOUISIANA STUDY

This study estimates the loss in welfare of projected Louisiana coastal wetlands disintegration. Various programs have initiated costly projects to terminate this disintegration process. But can these projects succeed, and will their benefits exceed their costs? This study addresses the benefits issues and estimates reductions in incomes and consumption opportunities and increases in costs that would be avoided if restoration and enhancement projects are successful. Estimated welfare losses that would be avoided do not include non‐user and lifestyle losses, which may be very important, and they do not include the costs of dismantling coastal infrastructure. These exclusions make the estimates of this study minimum estimates of welfare losses. Future economic welfare losses represent a 1990 present value in a range between $5.9 and $24.3 billion, depending upon discount rates and whether low or high loss estimates are used. In order to make these estimates more meaningful, the implied wetlands values were calculated on a per acre basis. These values ranged from $8,437 to $15,763 per acre.

A Comparison of Oligopoly Welfare Loss Estimates for U.S. Food Manufacturing

AbstractCapitalizing on theoretical advances in calculating deadweight welfare losses due to imperfect competition, we compare eight empirical estimates for the U.S. food manufacturing industries. The estimates incorporate varying theoretical assumptions about demand, supply, and firm pricing behavior; and utilize various data sources, time periods, and assumptions about the proper competitive benchmark. While the estimates of average allocative losses range widely, there is a high degree of congruence in the rankings of economic losses due to market power. Thus, from the perspective of efficient antitrust enforcement, the newer theoretical oligopoly approaches and the traditional structure‐conduct‐performance models would target similar industries.

The Cost Borne by Electricity Consumers Under Expanded Irrigation From the Columbia River

An analysis is done of the costs imposed on participants in the electricity market arising from irrigation diversions from the Columbia River. The hypotheses analyzed are (1) that electricity consumers' welfare is not affected by irrigation diversions, (2) that hydropower loss estimates derived using time and location specific data do not differ from those derived using average data, (3) that water year does not affect welfare losses, (4) that demand elasticity does not affect welfare losses, (5) that farmer pumping payments do not affect welfare losses, and (6) that interruption of water in critical flow years does not affect welfare losses. Electricity consumers are found to lose welfare when diversions are increased. Considering a potential diversion in central Washington, the annual loss to electricity consumers is in excess of $100 per acre ($247/hectare) developed. When the government delivers water to farmers' fields, this loss exceeds $200 per acre ($584/hectare). A sensitivity analysis of the welfare loss estimates shows that they are sensitive to the share that diverters pay of pumping costs and the potential interruption of diversions but not to different hydropower loss estimates, demand elasticity and water year. The results under critical water year interruption show a potential for reducing the tradeoffs between irrigation development and hydroelectric power generation as the costs fall by almost 80%.

Social Costs of Oligopoly and the Value of Competition

In this study we present a new methodology for estimating welfare losses caused by market power. We depart from past studies by explicitly taking into account different levels of market power. We provide estimates of: (a) actual social costs arising from existing market structures and (b) expected monopoly social costs that would occur if there were no competition actual or potential. The difference between actual and monopoly welfare losses represents the value of competition in existing markets. We further estimate the separate contributions of actual and potential competition to this value. Our methodology is based upon an empirical model of oligopoly behaviour and limit pricing. From this model we estimate the markup which would occur were there no competition. We use this markup in turn to estimate industry demand elasticity at the monopoly price. With this elasticity and the assumption of linear demand we can characterise demand, cost, and welfare conditions at each equilibrium: monopoly, actual, and competitive. With this new methodology and some other modifications of earlier techniques we provide not only new estimates of welfare losses, but also estimates of the value of competition under existing conditions. We find that the actual deadweight loss triangle averages 2-9 % of value of shipments for a sample of 37 industries. We also estimate that were these industries to maximise joint profits with no threat of entry, the welfare loss would be I I *6 %. The difference, 8-7 %, we attribute to the beneficial effects of potential competition (4 9 %) and actual competition (3.8 %). Our monopoly benchmark thus yields additional understanding of the value of competition. We cannot represent our study as having solved all of the problems associated with social cost estimation of monopoly power. Indeed, given general equilibrium problems associated with horizontal, vertical, and cross-industry aggregation interacting with the 'second best' problem, we doubt that all the problems can be solved, although we can point out some of the potentials for bias. After presenting our estimates we discuss the implications of sampling methodology and aggregation problems, demonstrating that potentially strong, but possibly offsetting, biases exist in all studies, including ours.

The Welfare Cost of Imperfect Industrial Competition in an Open Economy with an Application to Finland

The Harberger (1954) method of estimating welfare losses due to market concentration is extended to the case of an open economy. As an alternative to the Harberger method, which is somewhat impractical due to some limiting assumptions, a new method is suggested which uses concentration ratios as measures of departure from competitive conditions. Welfare loss estimates using the two techniques turn out to be surprisingly similar, generally indicating losses of between 0.1 and 0.3 percent of GDP. The outcome is closely reminiscent of the majority of American studies in this area.

Welfare loss estimates from homeowner tax preferences: Inflation, mortgage interest deductibility, and capital gains treatment

A model of taxation is presented and used to estimate the welfare loss from distortive treatment between capital gains on housing and on non-housing in the US and the UK. Taxation of nominal capital gains produced by inflation is taken into account. Estimated welfare losses are on the order of 1% of GNP—much higher than that obtained by previous authors.