Peter J.

Wilcoxen The Maxwell School

Economics 437 Syracuse University

Solution to Exercise 9 on Travel Costs

1 Calculate the number of visitors if a $1 admissions fee were charged.

The best approach is to construct a table like the one below:

1 2 3 4 5 6 7 8
Initial Cost New
Travel Initial New
Zone Pop. Visit With $1 Visit
Cost Visitors Visitors
Rate Fee Rate
1 $1 50000 2500 5% $2 4% 2000
2 $2 25000 1000 4% $3 3% 750
3 $3 12500 375 3% $4 2% 250
4 $4 6250 125 2% $5 0 0
5 $5 8000 0 0% $6 0 0
Total 4000 3000

Columns 1 through 4 are information that was given in the problem. Column 5, the visit rate, is
column 4 divided by column 3. It’s the percent of the zone’s population who visits the area.
Column 6 shows how much it would cost to visit from each zone once the $1 admission fee is in
place. It’s column 2 plus $1. Column 7 is the new visit rate. It’s obtained by looking up the
value in column 5 that corresponds to the new cost. For example, the new visit rate for people in
zone 1 is equal to the initial visit rate for people originally facing a travel cost of $2, which was
residents of zone 2. Column 8 is the product of column 7 and column 3. The sum of column 8 is
the total number of new visitors: 3000.

2 Calculate the daily value of keeping the land as a park.

The park’s value is equal to the consumer surplus it generates. It’s the area under the demand
curve:

P = A – B*Q

CS

4000 Q

If we knew the value of A, the consumer surplus would be easy to calculate:

-1-
(1) CS = (1/2) A * 4000 = 2000 A

To figure out A, we can use the information generated in part 1. From the initial data, we know
that when P=0, Q=4000. The travel cost calculation predicts that when P=$1, Q=3000. Inserting
the two sets of data into the demand curve gives us two equations in two unknowns, A and B:

(2) Demand: P = A – B*Q

(3) Actual data: 0 = A – B*4000

(4) TC projection: 1 = A – B*3000

Doing the algebra:

(5) A = 4000 B

(6) 1 = 4000 B – 3000 B

(7) 1 = 1000 B

(8) B = 0.001

(9) A=4

Checking:

Actual data: 0 = 4 – (1/1000) * 4000 = 0  ok!

TC projection: 1 = 4 – (1/1000) * 3000 = 1  ok!

Calculating the daily CS:

(10) CS = 2000 A

(11) CS = 8000

3 Present value
The PV of the stream of benefits is straightforward:
(12) Annual benefit = 8000*365 = $2.92 million

(13) PV = B/r = 2.92 million/0.05 = $58.4 million

-2-
4 Is the value calculated in part 2 likely to understate or overstate the value of the park?
Understate: the true value of the park is likely to be significantly higher. The travel cost method
only calculates the value of the park to people who actually visit it. In economic terminology, it
only measures “use value”. People who don’t visit might also value the park but their
willingness to pay for it will not be included in the CS we computed above. Some reasons that
non-users might be willing to pay are “existence value” (they just like knowing that the park is
there, perhaps for moral or ethical reasons) and “option demand” (they don’t visit it now but
think they might want to visit at some point in the future). To measure non-use values, a
contingent valuation study could be done.

5 Should the land be converted?

The value of the park is slightly lower than the value of housing: $58.4 million vs. $59 million.
However, the fact that the travel cost method misses non-use values means that the park should
probably NOT be converted. We know the travel cost estimate is biased downward and the gap
between it and the housing value is pretty small. It would be easy for non-use values to exceed
$600K in present value, in which case it would be better to keep the land as a park.

The reason non-use values could easily exceed $600K is that there are a lot of people who don’t
use the park. That means that even a small willingness to pay per non-user can add up to a large
number. In this problem, the total population of the 5 zones is 101,750. There are initially 4000
visitors and thus 101,750-4000 = 97,750 non-users. If each non-user were willing to pay $0.31
per year to preserve the park, the nonuse value would be 97,750*0.31/0.05 = $606K and it would
be better to keep the land as a park.

Finally, one other issue not addressed by the travel cost method is irreversibility. For all
practical purposes, the conversion to housing cannot be reversed. If there’s a chance that future
generations may value the park much more highly than present users, it may be worth preserving
the land now even though current benefits are a little less than the value of the housing. If it
turns out that the park is not very valuable in the future, the land can always be converted to
housing later.

-3-