Benefits Transfer and Social Costs

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Appendix B. Theoretical basis for measuring social costs

Because landfill disposal creates external costs to nearby residents, market failure often occurs. While benefits provided by a new landfill site are shared by all citizens, harms from a landfill (e.g., reduction in housing values) concentrate on nearby residents (Kunreuther and Kleindorfer 1986; Mitchell and Carson 1986). In order to measure the community’s social costs for each target site, the City determines to measure willingness tor pay (WTP) for avoiding external effects from the proposed landfill. Environmental policy usually focuses on improvements in environmental quality rather than deliberate degradation of the environment (Pearce et al. 2006)

In order to obtain the resident’s WTP for avoiding the landfill, the City considers the hypothetical situation: (i) pre policy (with the landfill); and (ii) post policy that removes the landfill). Following Mitchell and Carson (1989), the assumptions are that: (i) planners have a policy option to restrict the landfill on the target site; and (ii) the residents have a property right only to the initial situation Q^' (the level of environmental quality with the landfill). The residents do not have the property right to the benefits by the post policy that improves environmental quality. The value that a resident places on environmental quality (Q) with the landfill is defined as (pre policy) (for the theoretical background from equations B-1 to B-9, see Roberts et al. 1991; Freeman 2003):

U^0=U^0 (X,Q^0) (B-1)

where U^0 is the level of utility with a landfill nearby, X is a vector of quantities of private goods, and Q^0 is the level of environmental quality with a landfi...

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...ch is in between the SSUT and NSUT approaches. The WSTU approach approximately specifies the connection between explanatory variables and an underlying utility function. In the WSUT approach, study design variables can be included in order to explain different MWTP estimates that occur from different research designs. They suggested utilizing the SSUT and WSUT approaches for benefits transfer. The NSUT approach is not suitable for BT.

Following Bergstrom and Taylor (2006), this study utilizes the WSUT approach for BT (see Smith at al. 2002; Smith and Huang 1995; Walton et al. 2006). While core economic variables (e.g., Y and POP) based on economic theory are key factors for benefits transfer reflecting differences between target sites, study design variables (e.g., N, SE, and FUNCTION) can improve the meta-analysis function for BT by explaining different MWTP.

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