Methodology to Calculate Social Values for Air Pollution Using Discrete Choice Models

Abstract

A new methodology for the estimation of social values of urban air pollution for project appraisal is proposed. This is performed by using individual perceptions (marginal disutilities) of those who are directly affected by this externality, which are then transformed into social values using the social welfare approach developed by Gálvez and Jara‐Díaz in 1998. The approach also unveils the implicit social bias behind the commonly accepted willingness‐to‐pay measures. The method is illustrated using individual perceptions obtained from stated preference experiments within the context of residential location including three attributes: an objective measure of air pollution by zone of the city, an index of family accessibility to work and study, and the monthly rent. Discrete residential choice models were estimated by income group, from which indirect utility functions were obtained. Marginal disutilities were used to obtain social values of air pollution for each income group by means of the calculation of a social utility of money. The methodological underpinnings and difficulties of the approach are specially highlighted. The need to establish a national programme for the estimation of social values is emphasized.

Acknowledgements

Research was partially supported by FONDECYT, Chile (Grant No. 1050643), and by the Millennium Nucleus “Complex Engineering Systems”. The authors thank Gonzalo Rodríguez and Juan de Dios Ortúzar for collaboration on this research. Finally, thanks are also due for the useful comments of two anonymous referees.

Notes

1. Other forms are present in the literature, though, as the Life Quality Index (Pandey and Nathwany, 2003) or cost‐effective approaches (Farrow et al., 2005).

2. Note that this approach can also be applied to a privately financed project, where each individual contributes with a payment equal to his/her money gains dB_q . In this case, replacing dT_q by dB_q in equation (7) and plugging the result in equation (4) yields dB = ΣdB_q . This confirms that the approach is general and the social nature of equation (4) rests upon the way in which λ_s reflects a socially funded project.

3. US$1 = 506 Chilean pesos (Ch$) at the time of the survey.

4. Although taste variation is presumably captured through the estimation of the mean and variance of each parameter in utility, a large value of the latter implies that many individuals can present ‘wrong’ signs, e.g. negative values for the marginal utility of income, which is what happened in the present case. However, see Sillano and Ortúzar (2005), who also discuss this point using these data. Thus, statistical fit would sacrifice the underlying theory. Although imposing specific distributions might solve this problem, other shortcomings make this a still unresolved issue (Hensher and Greene, 2003). This is why these results were not used.