Environmental Valuation & Cost-Benefit News

Link: http://ftp.iza.org/dp4478.pdf

Abstract: In many countries environmental policies and regulations are implemented to improve environmental quality and thus individuals’ well-being. However, how do individuals value the environment? In this paper, we review the Life Satisfaction Approach (LSA) representing a new non-market valuation technique. The LSA builds on the recent development of subjective well-being research in economics and takes measures of reported life satisfaction as an empirical approximation to individual welfare. Micro-econometric life satisfaction functions are estimated taking into account environmental conditions along with income and other covariates. The estimated coefficients for the environmental good and income can then be used to calculate the implicit willingness-to-pay for the environmental good.

Applications:
The LSA has been used to value climatic conditions (Frijters and van Praag 1998; Rehdanz and Maddison 2005; Becchetti et al. 2007; Brereton et al. 2008), airport noise nuisance (van Praag, Bernard M. S. and Baarsma 2005), proximity to infrastructure (Brereton et al. 2008), urban regeneration schemes (Dolan and Metcalfe 2008), droughts (Carroll et al. 2009), floodings (Luechinger and Raschky.
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The most widely studied environmental disamenity is air pollution. Air pollution was the object of interest already in the first application of the HM (Hedonic Method) to the valuation of a public goods (Ridker and Henning 1967). By the mid 1990s, the number of studies allowed for a meta-analysis: Smith and Huang (1995) identified 86 MWTP estimates for a reduction in TSP in 37 different studies (the median MWTP (Marginal Willingness-To-Pay) was $46, the mean $228 in 2007 U.S. dollars). ... To date, at least seven (LSA) studies focused on air pollution.
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Conventional MWTP estimates often have a perverse positive sign or are at best economically small and statistically insignificant. In contrast, MWTP estimates based on IV regressions range between $176 and $315 (2007 U.S. dollars). In order to address this simultaneity problem, two of the studies ... use exogenous changes in air pollution to identify the effect of air pollution on life atisfaction. Luechinger (2009b) exploits the natural experiment created by the mandated scrubber installation at German power plants together with wind directions dividing counties into treatment and control groups. Luechinger (2009a) instruments a country’s air pollution with the long-range transboundary air pollution caused by emissions in foreign countries. ... MWTP estimates based on IV regressions are higher compared to the conventional estimates in both studies.

With the LSA it is straightforward to go beyond estimating average effects. Several studies report differentiated effects for different subgroups of the population such as predicted risk groups, the elderly or environmentalists (Levinson 2009; Luechinger 2009b; a).

by Bruno S. Frey 1 and 2, Simon Luechinger 2 and 3 and Alois Stutzer 2, 4 and 5
The Life Satisfaction Approach to Environmental Valuation
1. University of Zurich
2. CREMA
3. Swiss Federal Institute of Technology
4. University of Basel,
5. IZA; P.O. Box 7240; 53072 Bonn, Germany; Phone: +49-228-3894-0, Fax: +49-228-3894-180; E-mail: iza@iza.org
The Institute for the Study of Labor (IZA) www.IZA.org
Discussion Paper No. 4478; October, 2009