FERC personnel are often asked to calculate the economic value of one characteristic or aspect of an item being researched. For example, in the real estate industry, we have determined the value of the shoreline of a clean lake as compared to the shoreline of a polluted or dirty lake. One possible approach to determine item value is through the use of hedonic analysis.
In economics, hedonic regression -- also known as hedonic demand theory -- is a method of estimating demand or value. It reduces the item being researched into its basic characacteristics and then obtains estimates of the contributory value of each characteristic. For example, buildings are diverse in terms of the number of rooms, total square footage and other amenities. Because buildings are so different, it is difficult to estimate the demand for a particular building without knowing what component parts make up the building. Through hedonic anaylsis, a house can be broken down into characteristics such s the number of offices, plot size, or distance to the city center. A hedonic regression equation treats these characteristics (or bundles of characteristics) seperately, and estimates prices for each of them.
FERC contributors also conduct contingent valuation analysis, a method that uses survey data to establish a value for an asset or an activity. One example of the use of contingent valuation by the FERC involved direct interviews of individuals fishing on a lake. The individuals were asked how their behavior would change based on the quality of water in which they fished.
Contingented valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination. While such resources provide people a certain level of satisfaction, certain aspects of the resource does not have a "market price" since the aspects are not directly sold. For example, individuals receive a benefit from the unfettered view of a landscape. However, it is difficult to place a value on such a view, since it is a public good and is offered to all without a price. Contingent valuation surveys typically ask how much money people would be willing to pay (or willing to accept in the event they were asked to sell the item) to maintain the existence of (or be compensated for the loss of) an environmenal feature.
Often governments and firms are cconfronted with questions regarding the impact certain businesses or programs have on their local economy. Economic impact can be estimated according to input-output analysis, a technique used by FERC economists. Examples of projects to estimate regional economic impact include particular events such as the Walworth County Fair, the presence of a hospital, the wood-products industry in Langlade County, and the existence of a clean lake in Racine County.
Input-output models have a rich history in economic analysis. They use a matrix representation of a region's economy to predict the effect of changes in one industry on others and the effect provided by consumers (and the government) on the economy. Input-output shows the inter-industry relations of an economy including how the output of one industry is an input to another industry.
Public Finance and "Smart Growth"
The impact Tax Increment Financing (TIF) districts have on the property values of a community has been a growing area of research within the FERC. Included in this area is the concept that TIFs have the ability to drive communities to higher property valuaion levels and thus provide incremental tax benefits to the community as a whole. However, TIFs also have the ability to simply redistribute development within a community thereby resulting in no overall gain; there is simply a movement of gains and losses throughout the community with a net impact of "zero". It is also possible that the selection of winners and losers within a community is a costly deployment of assets that provides no benefit. Public Finance and "Smart Growth" analysis also examines the risk on unilateral abandonment of tools of economic growth in the face of competing interests throughout the state and the nation.
Involvement by FERC researchers in Public Finance addresses the proper role of government in maximizing tax revenues through urban and regional design. For example, analysis can be provided through the evaluation of methods to maximize the value of a lake, or by the review of policy decisions and their impact on property values. If private markets were able to provide efficient outcomes (i.e. no negative impact of pollution on property values), then there would be little or no role for government. If the location of firms were based simply on their relationship to raw materials and to markets, communities would not need to involve themselves in economic development strategies. However, in many cases, conditions for private market efficiency are violated. Where the financial impact of government intervention is often negative or zero, non-economic impacts (e.g. population growth and community satisfaction) can be included in the analysis to determine the ultimate benefit of proposed programs.
Economic Forecasting/Data Development
The development of "Indicators" of economic growth, or the forecasting of regional economic growth based on the determinants of past cycles of expansion and contraction, is another grwoing area of analysis within the FERC. For example, such analysis was also the basis of the FERC's Stateline Economic Report that examined economic grwoth within Wisconsin counties located along the Wisconsin/Illinois border. Using this type of forecasting, or the prediction of any of the elements of economic activity, can be made in great detail or may be very general. In any case, the forecast describes the expected future behavior of all or part of the economy and influence planning. Economic forecasting is usually based on a specific theory as to how the economy works. Some theories are complicated, and their application requires an elaborate tracing of cause and effect. Others are relatively simple, ascribing most developments in the economy to one or two basic factors. Obviously the theory applied by the forecaster is of the critical importance to the forecasting process; as the theory dictates the line of investigation, the statistics deemed most important, and many of the techniques utilized.
FERC forecasts tend to focus on key variables. The determination of key variables is often make in consultation with the client who had the insight regarding specific needs and expectations. However, these needs and personal judgments may also be no more than unconcious bias. Forecast based on judgment cannot be subjected to the kind of rigorous checks applied to forecasts developed by the use of more objective techniques. Consequently, the most accurate and useful forecasts are likely to be those founded on essential economic considerations and standard statistical techniques. Though they can then be modified by the application of judgment, the resulting changes should be stated explicitly enough so thay anyone wisihing to use a forecast will know where, and how, it has been affected by the forecaster's own judgment, or bias. FERC economists weigh the needs of the client with their experience expectations.