Question

Refer again to the problem of placing a value on lesser prairie chicken habitat. (Consider that the dollar value of benefits to society from preserving lesser prairie chicken habitat is an estimate of what society would be willing and able to pay for that level of habitat preservation. Briefly explain and provide a specific example of potential value for each of the following):

Methods for estimating nonmarket values generally fall into two categories: stated valuation methodologies and revealed valuation methodologies. Briefly discuss both and include in your discussion at least two specific methodological examples of each.

Answer 1

Revealed preference methods work to estimate WTP for environmental amenities and quality by exploiting data on actual behaviors and market choices that are related to the environmental good in question. People reveal their WTP for environmental goods with their actions. Three examples of such methods are below.

• Hedonic price analysis: We often cannot observe individuals taking direct action to change the quality of the environment to which they are exposed in a given location because they simply cannot effect such change; no one person, for example, can reduce the concentration of fine particles in the air near his house. We do, however, observe market data about the choices people make about where to live. If two houses are otherwise identical but one house is situated in a place with much cleaner air than the other, the benefit of breathing cleaner air will get capitalized in the value of that house. All else equal, neighborhoods with better environments will have more expensive homes. Analysts can gather data on housing prices and house characteristics (both environmental and nonenvironmental) and use a statistical analysis to estimate marginal WTP for elements of environmental quality that vary among the houses in the data set. The hedonic price analysis approach has been used to value amenities such as air quality, hazardous waste site cleanup, and open space.

Stated preference methods are now highly refined, but the essential idea is simple. These studies design a survey that presents people with information about hypothetical scenarios involving an environmental good, gather data on their responses to questions about how much they would pay for something or whether they would choose one scenario over another, and then analyze the data to estimate WTP for the good or WTA compensation for elimination or degradation of the good.

• Contingent valuation: The methodology called contingent valuation (or CV) gained prominent attention when it was used by economists to estimate the damage done to society by the oil spilled by Exxon’s Valdez oil tanker in Prince William Sound in 1989 (Carson et al., 2003). A CV survey gives a clear description of a single environmental amenity to be valued, such as a wetland restoration, whale populations, or improved water quality in a local lake. The description includes details about how the amenity would be created, and how the survey respondent would pay any money they claim to be willing to pay in support of the amenity. Respondents are then asked a question to elicit their WTP. This value elicitation question can be open ended (“How much would you be willing to pay in taxes to increase whale populations?) or closed ended (“Would you be willing to pay $30 to increase whale populations?). The resulting data set is analyzed to find the average WTP of people in the sample population.