A comparison of compensating surplus and budget reallocation with opportunity costs specified
Morrison, M and Hatton MacDonald, D, A comparison of compensating surplus and budget reallocation with opportunity costs specified, Applied Economics, 43, (30) pp. 4677-4688. ISSN 0003-6846 (2010) [Refereed Article]
The use of most nonmarket valuation techniques is predicated on respondents paying additional amounts of money for increased provision of a public good. However, in many circumstances this may not be appropriate. Treaty rights or the capacity of a government to raise and collect taxes in the context of a developing country may preclude the introduction of new taxes. Alternatively, there may be settings where respondents reject the notion of an additional payment and a different approach to estimating nonmarket values is needed. This article demonstrates a methodology for estimating compensating budget reallocation, which is the amount of expenditure on other public goods that respondents are willing to forego for the government to provide more of another public good. One of the main contributions of this article is a demonstration of how to improve the specification of the opportunity costs of budget reallocations. Second, using choice modelling for the estimation of budget reallocations is compared with the standard approach of estimating compensating surplus. The two approaches produce aggregate results that are of a similar magnitude, however the relative importance of the environmental attributes differs. We also investigate the similarity of value estimates across income groups, and similar to Swallow and McGonagle (2006), we find that budget reallocations produce a different set of preferences for lower income earners.