CONTENTS OF VOLUME .............................................. 2
Introduction to the Series ...................................... v
Contents of the Handbook ...................................... vii
Dedication ..................................................... xi
Preface to the Handbook ...................................... xiii
Chapter 12 Welfare Theory and Valuation
NANCY E. BOCKSTAEL AND A. MYRICK FREEMAN ........... 517
Abstract ...................................................... 518
Keywords ...................................................... 518
1. Introduction .............................................. 519
2. The nature of economic value .............................. 520
3. Overview of the environmental valuation problem ........... 522
4. Defining a measure of welfare change ...................... 525
4.1. Price changes ....................................... 528
4.2. Changes in environmental quality .................... 532
4.3. Uncertainty and risk ................................ 534
5. Aggregation and social welfare ............................ 535
6. Methods of valuation - overview ........................... 538
6.1. Revealed preference methods ......................... 538
6.2. Stated preference methods ........................... 539
7. Revealed preference methods for estimating values ......... 540
7.1. A taxonomy of models ................................ 541
7.2. Substitution restrictions .......................... 542
7.3. Complementary relationships ......................... 549
7.4. Exploiting other relationships, including weak
neutrality .......................................... 555
7.5. Welfare in a discrete choice context ................ 556
7.6. Hedonic models ...................................... 558
8. Use and nonuse values ..................................... 563
9. Conclusions ............................................... 566
Acknowledgements .............................................. 566
References .................................................... 566
Chapter 13 Environment, Uncertainty, and Option Values
KARL-GÖRAN MÄLER AND ANTHONY FISHER ................ 571
Abstract ...................................................... 572
Keywords ...................................................... 573
1. Introduction .............................................. 574
2. Decision-making and risk: a static framework .............. 575
2.1. The basic framework ................................. 575
2.2. Risk aversion ....................................... 576
2.3. The value of changes in risk ........................ 577
2.4. Aggregation over individuals ........................ 580
2.5. The cost of risk bearing ............................ 582
2.6. Option prices and option values ..................... 585
2.7. Price uncertainty ................................... 587
3. Intertemporal resolution of uncertainty ................... 589
3.1. Introduction ........................................ 589
3.2. A simple two-period model ........................... 590
3.3. An empirical application: to develop or to
preserve ............................................ 593
3.4. Some extensions of the Arrow-Fisher-Henry-
Hanemann analysis ................................... 595
3.5. Bayesian updating ................................... 595
3.6. Information structures .............................. 596
3.7. Irreversibility ..................................... 598
3.8. Irreversibility at a cost ........................... 601
3.9. The value of information ............................ 604
3.10. Uncertainty about irreversibility ................... 605
3.11. Option values ....................................... 607
4. Many periods, continuous time, and stochastic
processes ................................................. 609
4.1. Investment under uncertainty ........................ 609
4.2. Multiperiod case .................................... 611
4.3. Continuous time and stochastic processes ............ 612
4.4. An application: when to cut an old-growth redwood
forest .............................................. 614
Appendix A: on the equivalence of two representations of
environmental changes ............................. 616
Appendix B: a different notion of "more informative" .......... 617
References ................................................. 618
Further reading ............................................... 619
Chapter 14 Valuing the Environment as a Factor of Production
KENNETH E. MCCONNELL AND NANCY E. BOCKSTAEL ........ 621
Abstract ...................................................... 622
Keywords ...................................................... 622
1. Introduction .............................................. 623
2. The context of the problem ................................ 625
2.1. The individual or household's decision problem ...... 626
2.2. The firm's decision process ......................... 628
2.3. Issues of scale, interactions, and complexities ..... 630
3. The environment affects the firm's production
opportunities ............................................. 635
3.1. Exact measures of the change in producer surplus .... 636
3.2. The single output firm .............................. 636
3.3. The multiple output firm ............................ 638
3.4. Using input demand functions ........................ 640
3.5. Implications ........................................ 642
3.6. Practical approaches to measuring the change in
profits from a decline in quality of the
environment ......................................... 642
3.7. Valuing changes in output using a damage
function ............................................ 642
3.8. Valuing actual changes in output .................... 645
3.9. Using changes in costs .............................. 647
3.10. Further complications ............................... 647
3.11. Price changes and multiple markets .................. 648
3.12. Instability and uncertainty ......................... 649
3.13. Taking the institutional and regulatory
environment into account ............................ 650
3.14. Market distortions .................................. 650
3.15. Environmental inputs and open access resources:
the case of the fishery ............................. 651
3.16. Environmental influences on forestry
productivity ........................................ 655
4. The environment affects output produced by the
household ................................................. 657
4.1. The case of household production for consumption
and exchange ........................................ 657
4.2. Separable production and consumption ................ 657
4.3. When production and utility maximization are
nonseparable ........................................ 658
4.4. The case of pure household production ............... 661
4.5. Can the demand for the household produced good be
estimated? .......................................... 661
4.6. Averting behavior by the household .................. 662
4.7. Some further considerations ......................... 665
5. Conclusions ............................................... 665
Acknowledgements .............................................. 666
References .................................................... 666
Chapter 15 Recreation Demand Models
DANIEL J. PHANEUF AND V. KERRY SMITH ............... 671
Abstract ...................................................... 672
Keywords ...................................................... 672
1. Introduction .............................................. 673
2. What do we know about preferences for outdoorrecreation
after 50+ years? .......................................... 674
2.1. Recreation and consumer expenditures ................ 674
2.2. Preferences for recreation .......................... 676
2.3. Policy impacts ...................................... 681
3. Modeling recreation behavior .............................. 683
3.1. Modeling preferences ................................ 683
3.2. An "ideal" implementation of the basic model ........ 691
3.3. Structure of the primary empirical models
describing recreation demand ........................ 693
4. Recreation data ........................................... 717
4.1. Data collection as an economic process .............. 718
4.2. Combining revealed and stated preference data ....... 719
4.3. Linking site characteristics to behavioral data ..... 722
4.4. Measuring travel distances and costs ................ 724
5. Econometric issues in recreation demand modeling .......... 725
5.1. Single site demand models ........................... 725
5.2. Systems of recreation demand equations .............. 728
5.3. Random utility models ............................... 731
5.4. Dynamic models ...................................... 734
5.5. Nonparametric methods and models .................... 736
6. Measuring consumer surplus with travel cost models ........ 739
6.1. Price versus quality changes ........................ 739
6.2. Valuation measures with extensive margin choices
and unobserved heterogeneity ........................ 742
7. Research ahead ............................................ 745
Acknowledgements .............................................. 751
References .................................................... 751
Chapter 16 Property Value Models
RAYMOND B. PALMQUIST ............................... 763
Abstract ...................................................... 764
Keywords ...................................................... 764
1. Introduction .............................................. 765
2. Theoretical models and welfare measurement ................ 766
2.1. The theory of consumer behavior in markets for
differentiated products ............................. 766
2.2. Theory of hedonic welfare measurement ............... 774
2.3. Differentiated factors of production and land
markets ............................................. 783
3. Estimating the hedonic price schedule ..................... 783
3.1. Extent of the market ................................ 784
3.2. Stability over time ................................. 785
3.3. Functional form ..................................... 785
3.4. Nonparametric and semiparametric estimation ......... 786
3.5. Measurement of the environmental variables .......... 789
3.6. Other specification issues .......................... 790
3.7. Spatial econometric techniques ...................... 791
3.8. Rental prices vs. asset prices ...................... 794
3.9. Timing of environmental impacts ..................... 795
3.10. Repeat sales ........................................ 796
3.11. Search costs and time on the market ................. 797
4. Estimating the demand for environmental quality ........... 798
4.1. Identification ...................................... 798
4.2. Endogeneity ......................................... 800
5. Discrete choice models .................................... 802
5.1. Random utility models ............................... 802
5.2. Random bidding models ............................... 806
6. Locational equilibrium models ............................. 808
7. Conclusions and directions for future research ............ 810
Acknowledgements .............................................. 811
Appendix A .................................................... 811
References .................................................... 813
Chapter 17 Contingent Valuation
RICHARD T. CARSON AND W. MICHAEL HANEMANN .......... 821
Abstract ...................................................... 822
Keywords ...................................................... 823
1. Introduction .............................................. 824
2. History of contingent valuation ........................... 827
2.1. Antecedents and beginnings .......................... 827
2.2. Early empirical development ......................... 829
2.3. Health, transportation, and the allocation of
public budgets ...................................... 833
2.4. The existence value revolution ...................... 835
2.5. Developments from the mid-1970s through the late
1980s ............................................... 837
2.6. The Mitchell and Carson book ........................ 839
2.7. Exxon Valdez ........................................ 840
2.8. Literature production ............................... 841
2.9. Major issues ........................................ 843
3. Economic theory of contingent valuation ................... 844
3.1. Economic welfare measures ........................... 844
3.2. From WTP to CV response ............................. 847
3.3. Statistical model of CV responses ................... 851
3.4. Summary measures of welfare ......................... 857
4. Types of value/motives for valuation ...................... 862
4.1. Existence value ..................................... 862
4.2. Combining CV and RP data to measure use versus
nonuse value ........................................ 865
4.3. Contingent behavior ................................. 866
4.4. Bequest value ....................................... 867
4.5. Option value ........................................ 867
5. Elicitation formats for stated preference information ..... 869
5.1. Response probability models for alternative
elicitation formats ................................. 873
5.2. The issue of incentive compatibility ................ 875
5.3. Some general results on incentives .................. 876
5.4. A typology of the incentive structure of
elicitation formats ................................. 881
5.5. Promoting incentive compatibility ................... 883
6. Econometric issues ........................................ 884
6.1. Structure of WTP distributions ...................... 884
6.2. Issues in fitting binary discrete choice models ..... 887
6.3. Bid design .......................................... 889
6.4. Treatment of don't knows and protest zeros .......... 890
6.5. Treatment of respondent uncertainty ................. 891
6.6. Continuous response CV data ......................... 893
6.7. Choice experiments .................................. 894
6.8. Models with covariates .............................. 897
7. Survey design ............................................. 897
8. Survey administration ..................................... 901
8.1. Defining the population of interest ................. 901
8.2. Survey mode ......................................... 902
8.3. Sampling approaches ................................. 903
8.4. Nonresponse ......................................... 904
8.5. Sample size ......................................... 905
9. Consistency of CV results with theoretical prediction ..... 906
9.1. Neoclassical theory and contingent valuation ........ 906
9.2. WTP versus WTA ...................................... 907
9.3. Income elasticity of WTP ............................ 908
9.4. Sequencing, nesting, scope insensitivity and the
adding-up test ...................................... 910
10. Consistency of CV results with actual behavior ............ 914
11. Concluding remarks ........................................ 918
References .................................................... 920
Chapter 18 Cognitive Processes in Stated Preference Methods
BARUCH FISCHHOFF ................................... 937
Abstract ...................................................... 938
Keywords ...................................................... 938
1. Overview .................................................. 939
2. Origins ................................................... 940
2.1. Psychophysics stream ................................ 940
2.2. Decision theory stream .............................. 945
2.3. Confluence .......................................... 948
3. Evaluating environmental changes .......................... 949
3.1. Psychophysics stream ................................ 949
3.2. Decision theory stream .............................. 952
4. A cognitive approach to eliciting stated preferences for
environmental out comes ................................... 956
5. Conclusions ............................................... 963
6. Contingent valuation: a postscript ........................ 963
References .................................................... 964
Chapter 19 Experimental Methods and Valuation
JASON F. SHOGREN .................................. 969
Abstract ...................................................... 970
Keywords ...................................................... 970
1. Introduction .............................................. 971
2. The experimental method and mindset ....................... 972
3. Methods to establish rational valuation ................... 980
3.1. The divergence between WTP and WTA .................. 981
3.2. Preference reversals ................................ 985
3.3. Synopsis on rational valuation ...................... 991
4. Methods to measure values ................................. 993
4.1. Experiments valuing public goods .................... 994
4.2. Experiments valuing private risks ................... 997
4.3. Synopsis on direct valuation ....................... 1003
5. Methods to testbed surveys ............................... 1005
5.1. Hypothetical bias I: does it exist? ................ 1005
5.2. Hypothetical bias II: calibration .................. 1007
5.3. Framing effects I: surrogate bidding (scope/
embedding) ......................................... 1010
5.4. Framing II: incentive compatibility ................ 1013
5.5. Synopsis on testbedding ............................ 1016
6. Concluding remarks ....................................... 1018
Acknowledgements ............................................. 1020
References ................................................... 1020
Chapter 20 Quantifying and Valuing Environmental Health Risks
W. KIP VISCUSI AND TED GAYER ...................... 1029
Abstract ..................................................... 1030
Keywords ..................................................... 1030
1. Introduction ............................................. 1031
2. Risk assessment methodology .............................. 1032
2.1. Historical background and current regulatory
guidelines in the U.S. ............................. 1032
2.2. Risk assessment in other countries ................. 1041
3. Issues in risk assessment ................................ 1045
3.1. Conservative risk assessment practices ............. 1045
3.2. Synthetic v. natural chemicals ..................... 1050
3.3. Actual v. perceived risk ........................... 1051
4. Valuing environmental health risks ....................... 1058
4.1. The value of a statistical life v. the human
capital approach ................................... 1058
4.2. Valuing morbidity risks ............................ 1060
4.3. Using labor market data to estimate the value
of a statistical life .............................. 1063
4.4. Using housing market data to estimate the value
of a statistical cancer case ....................... 1079
5. Regulatory performance ................................... 1081
5.1. Legislative mandates, judicial review, and
executive oversight in the U.S. .................... 1088
5.2. Risk-risk analysis ................................. 1090
6. Conclusion ............................................... 1096
Acknowledgements ............................................. 1097
References ................................................... 1097
Author Index .................................................. 1-1
Subject Index ................................................ 1-23
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