IDEAS home Printed from https://ideas.repec.org/h/eee/envchp/2-12.html
   My bibliography  Save this book chapter

Welfare Theory and Valuation

In: Handbook of Environmental Economics

Author

Listed:
  • Bockstael, Nancy E.
  • Freeman III, A. Myrick

Abstract

Public policies that lead to a reduction in the emissions of air and water pollutants or the protection of sensitive ecosystems presumably increase the well-being of many members of society. Applied welfare economists are accustomed to measuring the welfare effects of policies that invoke price changes. If it is granted that the public good attributes of most dimensions of environmental quality preclude the development of well functioning markets for these service flows, how are the monetary values of changes in environmental quality to be measured? The past twenty to thirty years have seen the rapid development of the economic theory and techniques for measuring the demands for nonmarketed goods, and in this chapter we attempt to sketch out the major results. We review the basic concept of economic welfare and derive measures of welfare change for both changes in prices of market goods and changes in quantities and qualities of nonmarket goods. We then describe the principal economic techniques for estimating the benefits of environmental quality improvements when these improvements either directly affect individuals' well-being or indirectly affect individuals through constraints they face. Perhaps the major class of measurement methods is based on the observation that changes in environmental quality may cause individuals to alter purchases of goods and services that are complements or substitutes for environmental quality in their preference orderings. These revealed preference methods are the primary focus of this chapter. A second major approach to obtaining estimates of the benefits and costs of environmental changes, stated preference methods, are addressed in detail in later chapters. Our treatment of welfare effects places special emphasis on the connection between the underlying economic theory and practical empirical models.

Suggested Citation

  • Bockstael, Nancy E. & Freeman III, A. Myrick, 2006. "Welfare Theory and Valuation," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 12, pages 517-570, Elsevier.
  • Handle: RePEc:eee:envchp:2-12
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/B7P5M-4HN7B9Y-6/2/3290f5f9de7f8fff32c88b237d68cf85
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hazilla, Michael & Kopp, Raymond J, 1990. "Social Cost of Environmental Quality Regulations: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 853-873, August.
    2. Dennis Epple & Holger Sieg, 1999. "Estimating Equilibrium Models of Local Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 645-681, August.
    3. Bockstael, Nancy E & McConnell, Kenneth E, 1983. "Welfare Measurement in the Household Production Framework," American Economic Review, American Economic Association, vol. 73(4), pages 806-814, September.
    4. Irvine, Ian J & Sims, William A, 1998. "Measuring Consumer Surplus with Unknown Hicksian Demands," American Economic Review, American Economic Association, vol. 88(1), pages 314-322, March.
    5. Roe, Brian & Boyle, Kevin J. & Teisl, Mario F., 1996. "Using Conjoint Analysis to Derive Estimates of Compensating Variation," Journal of Environmental Economics and Management, Elsevier, vol. 31(2), pages 145-159, September.
    6. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-1278, December.
    7. Timothy J. Bartik, 2008. "Evaluating the Benefits of Non-marginal Reductions in Pollution Using Information on Defensive Expenditures," Book chapters authored by Upjohn Institute researchers, in: Joseph Herriges & Catherine L. Kling (ed.),Revealed Preference Approaches to Environmental Valuation, volume 0, pages 459-475, W.E. Upjohn Institute for Employment Research.
    8. Roback, Jennifer, 1988. "Wages, Rents, and Amenities: Differences among Workers and Regions," Economic Inquiry, Western Economic Association International, vol. 26(1), pages 23-41, January.
    9. Brekke, Kjell Arne, 1997. "The numeraire matters in cost-benefit analysis," Journal of Public Economics, Elsevier, vol. 64(1), pages 117-123, April.
    10. Douglas M. Larson, 1993. "On Measuring Existence Value," Land Economics, University of Wisconsin Press, vol. 69(4), pages 377-388.
    11. Jeffrey T. LaFrance, 1993. "Weak Separability in Applied Welfare Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(3), pages 770-775.
    12. Harrington, Winston & Krupnick, Alan J. & Spofford, Walter Jr., 1989. "The economic losses of a waterborne disease outbreak," Journal of Urban Economics, Elsevier, vol. 25(1), pages 116-137, January.
    13. Lucas, Robert E B, 1977. "Hedonic Wage Equations and Psychic Wages in the Returns to Schooling," American Economic Review, American Economic Association, vol. 67(4), pages 549-558, September.
    14. Kerry Smith, V. & Sieg, Holger & Spencer Banzhaf, H. & Walsh, Randall P., 2004. "General equilibrium benefits for environmental improvements: projected ozone reductions under EPA's Prospective Analysis for the Los Angeles air basin," Journal of Environmental Economics and Management, Elsevier, vol. 47(3), pages 559-584, May.
    15. Hanemann, Michael & Morey, Edward, 1992. "Separability, partial demand systems, and consumer's surplus measures," Journal of Environmental Economics and Management, Elsevier, vol. 22(3), pages 241-258, May.
    16. Cameron, Trudy Ann & Shaw, W. Douglass & Ragland, Shannon E. & Callaway, J. Mac & Keefe, Sally, 1996. "Using Actual And Contingent Behavior Data With Differing Levels Of Time Aggregation To Model Recreation Demand," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(1), pages 1-20, July.
    17. Bockstael, Nancy E. & Strand, Ivar E., Jr., 1985. "Distributional Issues And Nonmarket Benefit Measurement," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 10(2), pages 1-8, December.
    18. Edward Barbier & Ivar Strand & Suthawan Sathirathai, 2002. "Do Open Access Conditions Affect the Valuation of an Externality? Estimating the Welfare Effects of Mangrove-Fishery Linkages in Thailand," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 21(4), pages 343-365, April.
    19. Christopher Leggett, 2002. "Environmental Valuation with Imperfect Information The Case of the Random Utility Model," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 23(3), pages 343-355, November.
    20. Timothy J. Bartik, 2008. "Measuring the Benefits of Amenity Improvements in Hedonic Price Models," Book chapters authored by Upjohn Institute researchers, in: Richard E. Just & Darrell L. Hueth & Andrew Schmitz (ed.),Applied Welfare Economics, pages 643-654, W.E. Upjohn Institute for Employment Research.
    21. Epple, Dennis, 1987. "Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 59-80, February.
    22. Lankford, R. Hamilton, 1988. "Measuring welfare changes in settings with imposed quantities," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 45-63, March.
    23. Holger Sieg & V. Kerry Smith & H. Spencer Banzhaf & Randy Walsh, 2004. "Estimating The General Equilibrium Benefits Of Large Changes In Spatially Delineated Public Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1047-1077, November.
    24. Karl C. Samples & John A. Dixon & KMarcia M. Gowen, 1986. "Information Disclosure and Endangered Species Valuation," Land Economics, University of Wisconsin Press, vol. 62(3), pages 306-312.
    25. Foster, William & Just, Richard E., 1989. "Measuring welfare effects of product contamination with consumer uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 266-283, November.
    26. Jeffrey T. LaFrance & W. Michael Hanemann, 1989. "The Dual Structure of Incomplete Demand Systems," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(2), pages 262-274.
    27. Adamowicz W. & Louviere J. & Williams M., 1994. "Combining Revealed and Stated Preference Methods for Valuing Environmental Amenities," Journal of Environmental Economics and Management, Elsevier, vol. 26(3), pages 271-292, May.
    28. Vartia, Yrjo O, 1983. "Efficient Methods of Measuring Welfare Change and Compensated Income in Terms of Ordinary Demand Functions," Econometrica, Econometric Society, vol. 51(1), pages 79-98, January.
    29. Joseph A. Herriges & Catherine L. Kling (ed.), 1999. "Valuing Recreation and the Environment," Books, Edward Elgar Publishing, number 1315.
    30. Amartya Sen, 1995. "Environmental Evaluation And Social Choice: Contingent Valuation And The Market Analogy," The Japanese Economic Review, Japanese Economic Association, vol. 46(1), pages 23-37, March.
    31. Bockstael, N E & McConnell, K E, 1993. "Public Goods as Characteristics of Non-market Commodities," Economic Journal, Royal Economic Society, vol. 103(420), pages 1244-1257, September.
    32. Kahn, James R. & Kemp, W. Michael, 1985. "Economic losses associated with the degradation of an ecosystem: The case of submerged aquatic vegetation in Chesapeake Bay," Journal of Environmental Economics and Management, Elsevier, vol. 12(3), pages 246-263, September.
    33. T. de Scitovszky, 1941. "A Note on Welfare Propositions in Economics," Review of Economic Studies, Oxford University Press, vol. 9(1), pages 77-88.
    34. Larson, Douglas M., 1991. "Recovering weakly complementary preferences," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 97-108, September.
    35. Bartik, Timothy J, 1987. "The Estimation of Demand Parameters in Hedonic Price Models," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 81-88, February.
    36. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    37. Charles W. Abdalla & Brian A. Roach & Donald J. Epp, 1992. "Valuing Environmental Quality Changes Using Averting Expenditures: An Application to Groundwater Contamination," Land Economics, University of Wisconsin Press, vol. 68(2), pages 163-169.
    38. Herriges, Joseph A. & Kling, Catherine L., 1999. "Valuing Recreation and the Environment: Revealed Preference Methods in Theory and Practice, New Horizons in Environmental Economics," Staff General Research Papers Archive 12330, Iowa State University, Department of Economics.
    39. Brown, James N & Rosen, Harvey S, 1982. "On the Estimation of Structural Hedonic Price Models," Econometrica, Econometric Society, vol. 50(3), pages 765-768, May.
    40. Peter A. Diamond & Jerry A. Hausman, 1994. "Contingent Valuation: Is Some Number Better than No Number?," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 45-64, Fall.
    41. W. Michael Hanemann, 1994. "Valuing the Environment through Contingent Valuation," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 19-43, Fall.
    42. V. Kerry Smith & H. Spencer Banzhaf, 2004. "A Diagrammatic Exposition of Weak Complementarity and the Willig Condition," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 455-466.
    43. Kling, Catherine L. & Bockstael, Nancy, 1988. "Valuing Environmental Quality Changes when Quality is a Weak Complement to a Set of Goods," Staff General Research Papers Archive 1586, Iowa State University, Department of Economics.
    44. V. Kerry Smith & Yoshiaki Kaoru, 1990. "Signals or Noise? Explaining the Variation in Recreation Benefit Estimates," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(2), pages 419-433.
    45. Neill, Jon R., 1988. "Another theorem on using market demands to determine willingness to pay for non-traded goods," Journal of Environmental Economics and Management, Elsevier, vol. 15(2), pages 224-232, June.
    46. Kling, Catherine L., 1997. "Evaluation of the Gains from Combining Travel Cost and Contingent Valuation Data to Value Nonmarket Goods (An)," Staff General Research Papers Archive 1598, Iowa State University, Department of Economics.
    47. Lynne, Gary D. & Conroy, Patricia & Prochaska, Frederick J., 1981. "Economic valuation of marsh areas for marine production processes," Journal of Environmental Economics and Management, Elsevier, vol. 8(2), pages 175-186, June.
    48. Blomquist, Glenn C & Berger, Mark C & Hoehn, John P, 1988. "New Estimates of Quality of Life in Urban Areas," American Economic Review, American Economic Association, vol. 78(1), pages 89-107, March.
    49. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-647, June.
    50. Trudy Ann Cameron, 1992. "Combining Contingent Valuation and Travel Cost Data for the Valuation of Nonmarket Goods," Land Economics, University of Wisconsin Press, vol. 68(3), pages 302-317.
    51. Herriges, Joseph A. & Kling, Catherine L. & Phaneuf, Daniel J., 1999. "Corner Solution Models of Recreation Demand: A Comparison of Competing Frameworks," Staff General Research Papers Archive 1513, Iowa State University, Department of Economics.
    52. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-676, September.
    53. Murdoch, James C. & Thayer, Mark A., 1990. "The benefits of reducing the incidence of nonmelanoma skin cancers: A defensive expenditures approach," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 107-119, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mitsunobu Miyake, 2010. "Convergence theorems of willingness-to-pay and willingness-to-accept for nonmarket goods," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 34(4), pages 549-570, April.
    2. Bujosa Bestard, Angel & Riera Font, Antoni, 2010. "Estimating the aggregate value of forest recreation in a regional context," Journal of Forest Economics, Elsevier, vol. 16(3), pages 205-216, August.
    3. Hertzler, Greg, 2008. "Dynamic Contingent Valuation and Choice Modelling for Ecosystem Services," 2008 Conference (52nd), February 5-8, 2008, Canberra, Australia 6024, Australian Agricultural and Resource Economics Society.
    4. Vincent, Jeffrey R., 2012. "Ecosystem services and green growth," Policy Research Working Paper Series 6233, The World Bank.
    5. Pedro Herrera & Oscar Millones, 2011. "¿Cuál Es El Costo De La Contaminación Ambiental Minera Sobre Los Recursos Hídricos En El Perú?," Documentos de Trabajo / Working Papers 2011-321, Departamento de Economía - Pontificia Universidad Católica del Perú.
    6. Liu, Yuanyuan & Zeng, Yinchu & Yu, Xiaohua, 2009. "Consumer Willingness to Pay for Food Safety in Beijing: A Case Study of Food Additives," 2009 Conference, August 16-22, 2009, Beijing, China 51234, International Association of Agricultural Economists.
    7. Alfredo Dammert & Arturo Vásquez & Raúl García & Victor Zurita & Humberto Ortiz & Erix Ruiz, 2011. "¿Cuál Es El Costo De La Contaminación Ambiental Minerasobre Los Recursos Hídricos En El Perú?: Comentarios," Documentos de Trabajo / Working Papers 2011-326, Departamento de Economía - Pontificia Universidad Católica del Perú.
    8. Michael Ahlheim & Ulrike Lehr, 2008. "Equity and Aggregation in Environmental Valuation," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 295/2008, Department of Economics, University of Hohenheim, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Smith, V. Kerry, 2000. "JEEM and Non-market Valuation: 1974-1998," Journal of Environmental Economics and Management, Elsevier, vol. 39(3), pages 351-374, May.
    2. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    3. Nicolai V. Kuminoff & V. Kerry Smith & Christopher Timmins, 2010. "The New Economics of Equilibrium Sorting and its Transformational Role for Policy Evaluation," NBER Working Papers 16349, National Bureau of Economic Research, Inc.
    4. Revesz, Richard & Stavins, Robert, 2004. "Environmental Law and Policy," Working Paper Series rwp04-023, Harvard University, John F. Kennedy School of Government.
    5. Palmquist, Raymond B., 2006. "Property Value Models," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 16, pages 763-819, Elsevier.
    6. Phaneuf, Daniel J. & Smith, V. Kerry, 2006. "Recreation Demand Models," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 15, pages 671-761, Elsevier.
    7. Kenneth Y. Chay & Michael Greenstone, 2005. "Does Air Quality Matter? Evidence from the Housing Market," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 376-424, April.
    8. Alain Carpentier & Dominique Vermersch, 1997. "Measuring willingness to pay for drinking water quality using the econometrics of equivalence scales [Mesure du consentement à payer pour une qualité d'eau potable au moyen de la méthode économétri," Post-Print hal-02841037, HAL.
    9. Kovacs, Kent F. & Larson, Douglas M., 2006. "Recreation at open space and residential development patterns," 2006 Annual meeting, July 23-26, Long Beach, CA 271502, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Eom, Young-Sook & Larson, Douglas M., 2006. "Improving environmental valuation estimates through consistent use of revealed and stated preference information," Journal of Environmental Economics and Management, Elsevier, vol. 52(1), pages 501-516, July.
    11. Herriges, Joseph A. & Kling, Catherine L. & Phaneuf, Daniel J., 2004. "What's the use? welfare estimates from revealed preference models when weak complementarity does not hold," Journal of Environmental Economics and Management, Elsevier, vol. 47(1), pages 55-70, January.
    12. Nicolai V. Kuminoff & V. Kerry Smith & Christopher Timmins, 2013. "The New Economics of Equilibrium Sorting and Policy Evaluation Using Housing Markets," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1007-1062, December.
    13. Zhang, Congwen & Boyle, Kevin J. & Kuminoff, Nicolai V., 2015. "Partial identification of amenity demand functions," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 180-197.
    14. V. Smith & Mary Evans & H. Banzhaf & Christine Poulos, 2010. "Can Weak Substitution be Rehabilitated?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 45(2), pages 203-221, February.
    15. Richard T. Carson, 2011. "Contingent Valuation," Books, Edward Elgar Publishing, number 2489.
    16. Mark D. Agee & Thomas D. Crocker, 2002. "On Techniques to Value the Impact of Environmental Hazards on Children's Health," NCEE Working Paper Series 200208, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Sep 2002.
    17. Cunha-e-Sa, Maria A. & Ducla-Soares, Maria M., 1999. "Specification Tests for Mixed Demand Systems with an Emphasis on Combining Contingent Valuation and Revealed Data," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 215-233, September.
    18. Wolf, David & Klaiber, H. Allen & Gopalakrishnan, Sathya, 2022. "Beyond marginal: Estimating the demand for water quality," Resource and Energy Economics, Elsevier, vol. 68(C).
    19. Irina Klytchnikova & Michael Lokshin, 2009. "Measuring Welfare Gains from Better Quality Infrastructure," Journal of Infrastructure Development, India Development Foundation, vol. 1(2), pages 87-109, December.
    20. John C. Whitehead & Subhrendu K. Pattanayak & George L. Van Houtven & Brett R. Gelso, 2008. "Combining Revealed And Stated Preference Data To Estimate The Nonmarket Value Of Ecological Services: An Assessment Of The State Of The Science," Journal of Economic Surveys, Wiley Blackwell, vol. 22(5), pages 872-908, December.

    More about this item

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:envchp:2-12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.