These measures seem appealing, but are in fact deeply problematic. One of the most serious problems with direct measures is that they often yield woefully incomplete estimates of the benefits of environmental cleanup. Consider the example of cancer above. Suppose a woman gets cancer from drinking contaminated well water. By the time her illness is diagnosed, the cancer is so advanced that doctors can do little to treat her, and she dies a few months later. The medical expenditures associated with this illness are not very large; she and her family would surely have been willing to pay much more money to have eliminated the toxins so she did not ever get sick. The direct health cost measure of the benefits of cleaning up the contaminated water is a serious underestimate of the true benefit to society of that environmental improvement.
A second set of valuation tools called 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.
- Hedonic wage analysis : Some forms of pollution cause people to face higher risk of death in any given year. Thus, one important goal of valuation is to estimate a dollar value of reduced mortality resulting from pollution cleanup. Except in the movies, we rarely observe people choosing how much money they are willing to pay to save a specific person from certain death. However, all of us make choices every day that affect our risk of death. One important choice is which job to accept. Elementary school teachers face little job-related mortality risk. In contrast, coal miners, offshore oil rig workers, and deep sea fishermen accept high rates of accidental death when they take their jobs. By analyzing data on wage rates and worker death rates in a variety of different industries, we can estimate WTP to reduce the risk of death. Using such hedonic wage analysis , economists have developed measures of the value of a statistical life (VSL), which can be applied to physical estimates of reductions in pollution-related deaths to find the benefits of reduced mortality.