Benefits of goods such as clean air, water are hard to measure
Should be estimated when determining public policy
Immediate way to estimate benefits of environmental good is estimate cost generated by pollution
For example: benefit of clean water may be estimated by calculating explicit cost of dirty water
Example of cost estimates:
1. Cost of pollution on economic output
Lost farm output due to air pollution
One study on crop losses over 6-state area, estimated loss at 7 billion/year
2. Cost of illness caused by pollution
Table on asthma costs (split in direct/indirect)
Air pollution blamed for triggering asthma attacks
Limitations of estimating environmental benefits by accounting for costs of pollution:
A. Explicit costs do not fully account for what people willing to pay not to be in present circumstances
Implicit costs of asthma, or cold
B. Explicit costs do not capture change in behavior induced by pollution
Change in behavior is a cost to many people
Certain groups found to respond to heavy smog days by staying indoors
In the 90’s people avoided going to LA zoo during smog alerts
What would people pay to live i n world where didn’t have to avoid zoo?
Costs of averting pollution largely unmeasured

Benefit of environmental good
Measured by how much people are willing to pay for it
Difficult to measure because there is no market for most environmental goods
People are n’t normally observed explicitly paying for the good
Value of environmental good: (Example: Value of Flower in Wetlands article )
1. Use value
Benefits people get from direct use of good o Recreation o o
Health (eating clean fish etc)
Aesthetic appreciation
2. Non-use value
People willing to pay for some environmental goods they will never use
Example: wildlife in Alaska (drilling)
3. Option Value
Amount people willing to pay to preserve the option of experiencing good
Example: Grand Canyon
4. Bequest value
Willingness to pay to leave behind environmental good for future generations
Example: Grand Canyon’s value to grandkids

How do we measure willingness to pay?
1. Revealed preference
Value taken from actual observed choices people make
2. Stated preference
Value of environmental goods taken from survey data
sometimes measured by contingent valuation method
Asking people how much they value a good
Spotted Owl
Considered endangered species
Habitat in logging areas in Pacific Northwest
Cost of protecting species is lost timber production
Benefits?
Survey was conducted of 1000 households across US asking WTP to keep spotted owl
Total WTP found to be greater than cost
Non-use benefits were broad whereas costs were to a specific area
Problems with contingent value:
1. strategic bias: respondents may lie to try to influence particular outcome
2. Information bias: respondents valuing good that it has little information on
3. hypothetical bias: respondents not making actual choices
Suppose spotted owls discovered to be a delicacy?
Would market have protected owls?

Estimated mainly for use value
Has some of the same limitations as explicit cost estimates of pollution
1. travel cost method
Calculate expenditures by households travelling to places such as beaches, lakes
Can be used to estimated lost benefits from beach closures due to oil spill
Does not account for value by non-users
2. Housing price differences
Controlling for other factors, housing prices found lower in more polluted areas
Relationship implies value of clean air
3. Differences in wages across areas
Wages should be higher in more polluted areas
Measured difference in wage implies the benefit of eliminating pollution
4. Efforts to avert pollution
Expenditure on air conditioning, bottled water etc.