Valuing environmental losses: What promise does the right measure hold?

Abstract

This paper is concerned with the implications of a disparity between payment- and compensation-based measures of economic loss, examined in the context of contingent valuation survey methods. We first argue that a measure based on individuals' compensation demanded (CD), rather than their willingness to pay (WTP), is appropriate when losses are proposed and that disparities between WTP and CD measures often are real rather than artifactual. We then point out some of the problems involved in estimating CD measures, relate these to several hypotheses about people's behavior, and conclude that they present a formidable challenge to the accurate estimation of welfare losses. Finally, several guidelines are proposed regarding the use and further development of compensation-based measures of economic value.