The Measurement of Environmental and Resource Values The first edition of this important work was the winner of the 2002 Publication of Enduring Quality award by the Association of Environmental and Resource Economists. The continuing premise for the book is that estimates of the economic values of environmental and natural resource services are essential for effective policy-making. Like previous editions, the third edition, which includes two additional co-authors, presents a comprehensive treatment of the theory and methods involved in estimating environmental benefits. Researchers, policy-makers, and practitioners will welcome the work as an up- to-date reference on recent developments. Students will gain a better understanding of the contribution that economics as a discipline can make to decisions concerning pollution control and human health, recreation, environmental amenities, and other critical issues concerning the way we use and interact with environmental and natural resource systems. To reflect recent progress in both the theory and practice of non-market valuation, this third edition includes more details on empirical approaches to measurement, expanded discussion of the reasons for divergence between “willingness to pay” and “willingness to accept compensation,” and increased coverage of econometric issues encountered in estimation. In keeping with its cutting-edge orientation, it also includes more discussion of survey design, equilibrium sorting models, and the implications of behavioral economics for welfare measurements and benefit cost analysis. A. Myrick Freeman III is William D. Shipman Professor of Economics Emeritus at Bowdoin College in Maine, USA, and a former Senior Fellow at Resources for the Future (RFF), Washington DC, USA. Joseph A. Herriges is Professor of Economics at Iowa State University, USA. He was Managing Editor of the Journal of Environmental Economics and Management from 2001 to 2006. Catherine L. Kling is Charles F. Curtiss Distinguished Professor at Iowa State University, USA, and the Director of the Center for Agricultural and Rural Development. She is a former President of the Association of Environmental and Resource Economists. About Resources for the Future and RFF Press Resources for the Future (RFF) improves environmental and natural resource policymaking worldwide through independent social science research of the highest caliber. Founded in 1952, RFF pioneered the application of economics as a tool for developing more effective policy about the use and conservation of natural resources. Its scholars continue to employ social science methods to analyze critical issues concerning pollution control, energy policy, land and water use, hazardous waste, climate change, biodiversity, and the environmental challenges of developing countries. RFF Press supports the mission of RFF by publishing book-length works that present a broad range of approaches to the study of natural resources and the environment. Its authors and editors include RFF staff, researchers from the larger academic and policy communities, and journalists. Audiences for publications by RFF Press include all of the participants in the policymaking process—scholars, the media, advocacy groups, NGOs, professionals in business and government, and the public. Resources for the Future Board of Directors Board Leadership W. Bowman Cutter Chair John M. Deutch Vice Chair Frank E. Loy Vice Chair Lawrence H. Linden Treasurer Philip R. Sharp President Board Members Vicky A. Bailey Anthony Bernhardt Trudy Ann Cameron Red Cavaney Mohamed T. El-Ashry Linda J. Fisher C. Boyden Gray David Hawkins Rick Holley Peter R. Kagan Sally Katzen Rubén Kraiem Bob Litterman Richard G. Newell Henry Schacht Richard Schmalensee Lisa A. Stewart Joseph Stiglitz Mark R. Tercek Chair Emeriti Darius W. Gaskins, Jr. Robert E. Grady Editorial Advisers for RFF Press Walter A. Rosenbaum, University of Florida Jeffrey K. Stine, Smithsonian Institution “This new edition provides the complete package in environmental valuation – adding more detail on empirical methods, surveys, behavioral economics, and frontier issues to the previous classic edition. A particularly appealing aspect of the book is the rigorous linkage between economic theory and the practice of valuation. It is truly an outstanding contribution to the field.” – W.L. (Vic) Adamowicz, Professor, Department of Resource Economics and Environmental Sociology, University of Alberta, Canada “This superb book sets a new standard for guidelines regarding the valuation of environmental resources. Embracing the full range of available methods, it provides a comprehensive and readily accessible guide to valuation exercises that will prove a key reference for both researchers and research users.” – Ian Bateman, Professor of Environmental Economics, University of East Anglia, UK “This book, co-authored by three of the world’s leading experts in the field of nonmarket valuation, should be on the shelf of anyone interested in an authoritative and up-to-date source of information about the theory and methods used in this field.” – Kathleen Segerson, Alumni Association Distinguished Professor, Department of Economics, University of Connecticut, USA The Measurement of Environmental and Resource Values Theory and Methods Third Edition A. Myrick Freeman III, Joseph A. Herriges, and Catherine L. Kling RFF PRESS RESOURCES FOR THE FUTURE First published 2014 by RFF Press Taylor & Francis, 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN And by RFF Press Routledge, 711 Third Avenue, New York, NY 10017 RFF Press is an imprint of the Taylor & Francis Group, an informa business First edition published 1993 Second edition published 2003 © 2014 Taylor & Francis The rights of A. Myrick Freeman III, Joseph A. Herriges and Catherine L. Kling to be identified as authors of this work have been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Freeman, A. Myrick, 1936- The measurement of environmental and resource values : theory and methods / Myrick Freeman III, Joseph A. Herriges, Catherine L. Kling. -- Third edition. pages cm Summary: “The first edition of this important work was the winner of the 2002 Publication of Enduring Quality award by the Association of Environmental and Resource Economists. The continuing premise for the book is that estimates of the economic values of environmental and natural resource services are essential for effective policy-making. As previous editions, the third edition, which includes two additional co-authors, presents a comprehensive treatment of the theory and methods involved in estimating environmental benefits”-- Provided by publisher. Includes bibliographical references and index. 1. Environmental policy--Cost effectiveness. 2. Environmental policy--Evaluation. I. Herriges, Joseph A., 1956- II. Kling, Catherine L. III. Title. HC79.E5F713 2014 333.7--dc23 2013042862 ISBN: 978-0-415-50157-6 (hbk) ISBN: 978-0-415-50158-3 (pbk) ISBN: 978-1-315-78091-7 (ebk) Typeset in Baskerville by HWA Text and Data Management, London Dedicated to our spouses: Claire M. Darrow Mary J. Herriges Terence J. Alexander This page intentionally left blank Contents List of illustrations xii Foreword xiv Preface xvi Acknowledgments xviii 1 Resource Evaluation and Public Policy 1 The Assets of Nature 2 The Economic Concept of Value 6 Economic Values in Public Policy 9 Classifications of Values 12 Dealing with Uncertainties in Policymaking 14 Ex Post and Ex Ante Analysis of Values 15 Preview 16 Mathematical Notation 17 2 Measuring Values, Benefits, and Costs: An Overview 20 Resource Values as Shadow Prices 20 Methods for Measuring Values 24 The Methodology of Revealed Preference Models 26 A Model of Environmental and Resource Values 28 The Noneconomic Foundations of Resource Valuation 32 The Welfare Economics of Costs 35 Summary 38 3 Welfare Measures: Definitions and Concepts 40 Individual Preferences and Demand 42 Welfare Measures for Continuous Goods: Price Changes 46 Welfare Measures for Continuous Goods: Quantity Changes 65 Welfare Measures for Discrete Goods 68 x Contents When CV and EV Diverge: Willingness to Pay versus Willingness to Accept Compensation 71 Aggregation and Social Welfare 74 Summary 76 4 Welfare Measures: Theoretical Basis for Empirical Assessment 81 Environmental Quality as a Factor Input 82 An Individual’s Demand for Environmental Quality 85 The Structure of Preferences and Measures of Value 86 Nonuse Values 110 Summary 123 5 Valuing Changes in Risk 127 Individual Uncertainty and Welfare 128 Aggregation and the Welfare Criterion 137 Uncertainty and Welfare in a Dynamic Setting 145 Revealed Preference Methods for Measuring Values 151 Option Price, Option Value, and Expected Damages 160 Summary 166 6 Aggregation of Values across Time 171 Individual Preferences and Intertemporal Choice