The economics literature has developed various methods to recover the values for environmental commodities. Two such methods related to revealed preference are property value hedonic models and equilibrium sorting models. These strategies employ the actual decisions that households make in the real estate market to indirectly measure household demand for environmental quality. The hedonic method decomposes the equilibrium price of a house based on the house’s structural and neighborhood/environmental characteristics to recover marginal willingness to pay (MWTP). The more recent equilibrium sorting literature estimates environmental values by combining equilibrium housing outcomes with a formal model of the residential choice process. The two predominant frameworks of empirical sorting models that have been adopted in the literature are the vertical pure characteristics model (PCM) and the random utility model (RUM). Along with assumptions on the structure of preferences, a formal model of the choice process on the demand side, and a characterization of the supply side to close the model, these sorting models can predict outcomes that allow for re-equilibration of prices and endogenous attributes following a counterfactual policy change. Innovations to the hedonic model have enabled researchers to more aptly value environmental goods in the face of complications such as non-marginal changes (i.e., identification and endogeneity concerns with respect to recovering the entire demand curve), non-stable hedonic equilibria, and household dynamic behavior. Recent advancements in the sorting literature have also allowed these models to accommodate consumer dynamic behavior, labor markets considerations, and imperfect information. These established methods to estimate demand for environmental quality are a crucial input into environmental policymaking. A better understanding of these models, their assumptions, and the potential implications on benefit estimates due to their assumptions would allow regulators to have more confidence in applying these models’ estimates in welfare calculations.
Alexandra Dehnhardt, Kati Häfner, Anna-Marie Blankenbach, and Jürgen Meyerhoff
All types of wetlands around the world are heavily threatened. According to the Ramsar Convention on Wetlands, they comprise “areas of marsh, fen, peatland or water, whether natural or artificial, permanent or temporary, with water that is static or flowing, fresh, brackish, or salt.” While they are estimated still to cover 1,280 million hectares worldwide, large shares of wetlands were destroyed during the 20th century, mainly as a result of land use changes. According to the Millennium Ecosystem Assessment (MEA), this applies above all to North America, Europe, Australia, and New Zealand, but wetlands were also heavily degraded in other parts of the world. Moreover, degradation is expected to accelerate in the future due to global environmental change. These developments are alarming because wetlands deliver a broad range of ecosystem services to societies, contributing significantly to human well-being. Among those services are water supply and purification, flood regulation, climate regulation, and opportunities for recreation, to name only a few. The benefits humans derive from those services, however, often are not reflected in markets as they are public goods in nature. Thus, arguing in favor of the preservation of wetlands requires, inter alia, to make the non-marketed economic benefits more visible and comparable to those from alternative—generally private—uses of converted wetlands, which are often much smaller. The significance of the non-market value of wetland services has been demonstrated in the literature: the benefits derived from wetlands have been one of the most frequently investigated topics in environmental economics and are integrated in meta-analyses devoted to synthesizing the present knowledge about the value of wetlands. The meta-analyses that cover both different types of wetlands in different landscapes as well as different geographical regions are supplemented by recent primary studies on topics of increasing importance such as floodplains and peatlands, as they bear, for example, a large flood regulation and climate change mitigation potential, respectively. The results underpin that the conversion of wetlands is accompanied by significant losses in benefits. Moreover, wetland preservation is economically beneficial given the large number of ecosystem services provided by wetland ecosystems. Thus, decision-making that might affect the status and amount of wetlands directly or indirectly should consider the full range of benefits of wetland ecosystems.