6.3 Environmental valuation  (Page 5/23)

• Travel cost analysis : Many natural amenities, such as forests, lakes, and parks are enjoyed by the public free of charge. While there is no formal market for “hours of quality outdoor recreation,” people do incur costs associated with such recreation—gas purchased to drive to the site, hotel expenses for overnight trips, and the opportunity cost of the time spent on the trip. If environmental quality is valued, people will be willing to pay higher travel costs to visit recreation sites with higher levels of environmental quality (e.g., cleaner water in the lake, more fish to catch, a better view from a mountain with low air pollution). In travel cost analysis    , researchers gather data on the environmental features of a set of recreation sites and the choices people make about visiting those sites—which they choose to visit, and how often—and apply statistical analysis to those data to estimate WTP for improved quality of natural amenities.

One of the greatest strengths of revealed preference valuation methods is that they use information about real behavior rather than hypothetical choices. These approaches also yield estimates of WTP that are often more complete than the results of direct market measure studies.

Revealed preference studies do, however, have weaknesses and limitations. First, they only give good estimates of WTP for environmental goods if people have full and accurate information about environmental quality and associated risks. For example, hedonic estimates of WTP to avoid living with polluted air will be biased downward if people in a city do not know how air pollution varies among neighborhoods. Second, some revealed preference approaches are only valid if the relevant markets (labor markets for a wage study, housing markets for a hedonic price study) are not plagued by market power and transaction costs that prevent efficient equilibria from being reached. For example, if workers find it too daunting and costly to move from one region to another, then coal miners may fail to earn the wage premium that would be associated with such a risky job in the absence of relocation hurdles. Third, revealed preference approaches cannot be used to estimate values for levels of environmental quality that are not observed in real-world data. If all the lakes in a region are terribly polluted, we cannot use a travel cost study of lake site choice to identify WTP for very clean lakes. Fourth, revealed preference methods can capture only use values, not non-use values.

The limitations of revealed preference valuation tools motivated environmental and natural resource economists to develop valuation methods that do not require analysts to be able to observe real-world behavior related to the amenity being valued. These 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.