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Water is rising on the policy agenda as population growth and climate change intensify scarcity, shocks, and access inequalities. The conventional economic policy recommendations—privatization, pricing, and property rights—have struggled due to a failure to account adequately for the politics of water and the associated distributional conflicts. We identify distinctive social and physical characteristics of water supply and demand, and explore their implications for three central areas of water policy: financing infrastructure, pricing, and property rights reform. Growing dependence on groundwater and non-networked water supplies exacerbates these challenges and reinforces the need to rethink the economics of water and tackle the political challenges head on. Meeting the water sustainable development goals would require institutional and technological innovations to supply, allocate, and manage water, as well as a sustained political and financial commitment to address those who might be left behind.

We consider the connection between water marketing and the modification of property rights to water in Australia, highlighting the Australian’s distinctiveness through a contrast with water rights in the western US (especially California). Australia started out the same as California, but in the 1880s it abandoned California’s system and adopted a new approach, ending the common law property right to water and creating a statutory right that could be modified by administrative fiat. This shifted the arena for dispute resolution from courts to parliaments. It eliminated the seniority inherent in appropriative water rights and it sidelined issues of third-party impacts. Another difference was the tight control of irrigation institutions by state governments and the national government’s willingness to intervene in state and local water management. Australian water reform was wrapped in politics. When there were successes, this is because the politics were managed adroitly; when political challenges proved insurmountable, reform stalled.

Downscaled climate change projections for California, when translated into changes in irrigation water delivery and then into profit from agriculture in the Central Valley, show an increase in conventional measures of variability such as the variance. However, these increases are modest and mask a more pronounced increase in downside risk, defined as the probability of unfavorable outcomes of water supply or profit. This paper describes the concept of downside risk and measures it as it applies to outcomes for Central Valley agriculture projected under four climate change scenarios. We compare the effect of downside risk aversion versus conventional risk aversion or risk neutrality when assessing the impact of climate change on the profitability of Central Valley agriculture. We find that, when downside risk is considered, the assessment of losses due to climate change increases substantially.

Baron questions the methods and conclusions of our contingent valuation study, which assessed the economic value to the American public of the 2010 oil spill in the Gulf of Mexico. In the study, survey respondents were each randomly assigned to be told about either (i) a set of effects of the oil

This article proposes contemporary best-practice recommendations forstated preference (SP) studies used to inform decision making, grounded in the accumulate body of peer-reviewed literature. These recommendations consider the use of SP methods to estimate both use and non-use (passive-use) values, and cover the broad SP domain, including contingent valuation and discrete choice experiments.We focus on applications to public goods in the context of the environmentand human health but also consider ways in which the proposed recommendations might apply to other common areas of application. The recommendations recognize that SP results may be used and reused (benefit transfers) by governmental agencies and nongovernmental organizations, and that all such applications must be considered.The intended result is a set of guidelines for SP studies that is more comprehensive than that of the original National Oceanic and Atmospheric Administration (NOAA) Blue Ribbon Panel on contingent valuation, is more germane to contemporary applications, and reflects the two decades of research since that time. We also distinguish between practices for which accumulated research is sufficient to support recommendations and those for which greater uncertainty remains. The goal of this article is to raise the quality of SP studies used to support decision making and promote research that will further enhance the practice of these studies worldwide.

This paper draws on the history of irrigation in the US West to address two sets of questions: First, did problems of collective action arise during the development of irrigation in that region? If so, were they successfully resolved? If so, how—did the solution align with Ostrom, 1993 . Water Resour. Res. 29 (7), 1907–1912 design principles? Second, how sustainable was the system of water management institutions and water property rights that emerged in the US West? Has it been conducive to the efficient use of water in the West, regarded as a necessary (although not sufficient) condition for sustainability? If not, why not? It is crucial to distinguish the collective action task of building an irrigation system from that of running a system once constructed. With regard to irrigation system construction and financing, the key was not trust, as some have suggested, but capital: irrigation systems are extremely capital intensive, the capital is very long-lived, it is not modular – it cannot usefully be installed bit by bit – it is marked by major economies of scale, and it is not fungible elsewhere or in other uses. This creates massive problems of contracting, default, and bankruptcy, which in fact were a hallmark of irrigation development in the West. The failure to solve collective action in system construction contrasted with the eventual success at collectively operating an irrigation system once constructed, which was accomplished through two idiosyncratic American mechanisms—mutual water companies and special government districts. The development of irrigation in the US West left a legacy of problems with the definition and administration of property rights to water, yielding a dual system with water relatively fungible within irrigation organizations but, typically, not between them. The diversity and complexity of property rights to water was a predictable consequence of the economics and politics of water development.

This article reviews the rapidly growing literature on structural models of complementary choices. It discusses recent modeling developments and identifies promising areas for future research.

Oil spills are capable of causing major environmental insults that raise the emotional loads of individuals across society. In this paper we consider the role of emotions in heterogeneous responses of individuals in the non-market valuation of an oil prevention program in Spain. Heterogeneity is modeled with a smoothly mixing regression (SMR) model that allows researchers to explain the probability that individuals belong to the latent segments of WTP. The results show that heterogeneity in WTP responses is explained by the specific emotional reactions of individuals (upset, sadness, indifference) rather than by their socioeconomic characteristics. Thus, the investigation of the emotional reactions of individuals can provide useful tools for the design of non-market valuation studies, providing more accurate predictions of the potential behavior of individuals in constructed markets for damage assessment.

Transport is essential for the control of future greenhouse gas (GHG) emissions and thus a target for active policy intervention in the future. Yet, social preferences for policies are likely to play an important role. In this paper we first review the existing literature on preferences regarding low-GHG car fuels, but also covering policy instruments and strategies in this area. We then present the results of a survey of Spanish households aimed at measuring preferences for climate change policies. We find a positive willingness to pay (WTP) (in the form of higher car fuel prices) for a policy to reduce GHG emissions through biofuels. There is, however, significant heterogeneity in public preferences due to personal motivations (accounted for via factor analysis of responses to attitudinal questions) and to socio-demographic variables. © 2013 Elsevier B.V.

Estimation of consistent parameter estimates for recreational demand models faces challenges arising from the choice-based nature of the data collected primarily for resource management purposes. As an alternative to randomized respondent-based sampling, choice-based onsite sampling can provide information on actual choices made by a subset of the population where participation has a low incidence. While the literature has shown that under specific restrictions the estimation of choice models from onsite sampling data yields unbiased fixed parameter estimates for the conditional logit model, this result does not carry over to estimation of the random parameter logit model. We propose an estimator for the unbiased estimation of the random parameter model using choice-based data; our estimator uses weights based on information about the level of sampling effort. An empirical application of the standard and weighted discrete choice RUM models to onsite sample data on recreational fishing illustrates the advantages of the proposed estimator. The estimation results indicate the compensating variation associated with an decrease, or increase, of 50 % in expected catch rates for a recreational shoreline sportfishing trip to a man-made structure in southern California is $$-{\$}2.80$$ or $${\$}3.54$$ per trip, respectively.

In their Perspective “The trouble with negative emissions” (14 October, p. [182][1] ), K. Anderson and G. Peters assert that negative-emissions technologies are an “unjust and high-stakes gamble.” This characterization would sideline negative-emissions technologies and remove potentially important options from the portfolio for mitigating and ameliorating climate change. As Anderson and Peters acknowledge, the remaining carbon budget is pitifully small; at the current rate, the world will blow through 600 Gt of CO2 in 15 years. Dumping this much CO2 in the atmosphere will almost certainly result in more than 1.5°C warming. Indeed, as advocates of a 350-ppm target point out, the remaining CO2 budget could be negative. Anderson and Peters provide no evidence that faith in negative-emissions technologies is to blame for a delay in implementing other mitigation plans or for the failure of countries to cut emissions. This failure is easily explained by the free-riding behavior of some countries ([ 1 ][2]), and taking negative-emissions technologies off the table would not make collective action any easier. Indeed, given that negative-emission technologies require financial contributions, not changes in behavior, their development and deployment may well be less vulnerable to free riding. Furthermore, we need a lot of arrows in the quiver to stand a chance of meeting the Paris targets. This was a key finding from the integrated assessment modelers ([ 2 ][3]). Rather than dividing mitigation into competing strategies, an inclusive approach would focus on stopping climate change as fast as possible while minimizing risk to vulnerable populations and to societal stability. Negative-emission technologies are not unique in facing challenges, risks, and uncertainties. It is true that negative emissions may fall short of closing the gap, but to characterize them as a high-stakes gamble is not consistent with the facts and the plausibility of meeting the Paris goals without them. Throwing a life-preserver to a drowning victim may not assure a successful rescue, but it is not a high-stakes gamble. Offering the life-preserver is preferable to withholding it, even though it might reduce the victim's incentive for learning how to swim. ![][4] At the current rate of carbon emissions, it will be difficult to meet climate goals. PHOTO: YOCAMON [www.sciencemag.org/cgi/content/full/354/6313/714-a/DC1][5] Full author list 1. [↵][6]1. S. Barrett, 2. R. Stavins , Int. Environ. Agreements 3, 349 (2003). [OpenUrl][7] 2. [↵][8]1. O. Edenhofer 2. et al IPCC, Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, O. Edenhofer et al., Eds. (Cambridge Univ. Press, 2014). [1]: http://www.sciencemag.org/content/354/6309/182.full [2]: #ref-1 [3]: #ref-2 [4]: /embed/graphic-1.gif [5]: http://www.sciencemag.org/cgi/content/full/354/6313/714-a/DC1 [6]: #xref-ref-1-1 "View reference 1 in text" [7]: {openurl}?query=rft.jtitle%253DInt.%2BEnviron.%2BAgreements%26rft.volume%253D3%26rft.spage%253D349%26rft.genre%253Darticle%26rft_val_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Ajournal%26ctx_ver%253DZ39.88-2004%26url_ver%253DZ39.88-2004%26url_ctx_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Actx [8]: #xref-ref-2-1 "View reference 2 in text"

Although complex pricing schedules are increasingly common in utility billing, it is difficult to determine whether consumers respond to complicated marginal prices because price changes are often confounded with simultaneous demand shocks or non-price policies. To overcome this challenge, we exploit a natural experiment - the introduction of a third price block in an increasing block pricing schedule for water - in Santa Cruz, California. Using a regression discontinuity design, we find that consumers do respond to changes in marginal price. Doubling marginal price led to a 12% decrease in water use (500 cubic feet per bill) among high-use households.

In this paper, we extend the latent segmentation approach to the Kuhn–Tucker (KT) model. The proposed approach models heterogeneity in preferences for recreational behavior, using a utility theoretical framework to simultaneously model participation and site selection decisions. Estimation of the latent segmentation KT model with standard maximum likelihood techniques is numerically difficult because of the large number of parameters in the segment membership functions and the utility function for each latent segment. To address this problem, we propose the expectation-maximization (EM) algorithm to estimate the model. In the empirical section, we implement the EM latent segmentation KT approach to analyze a Southern California beach recreation data set. Our empirical analysis suggests that three groups exist in the sample. Using the model to analyze two hypothetical beach management policy scenarios illustrates different welfare impacts across groups.

Influenced by the success of emission trading in the US for sulphur dioxide (SO 2 ), some economists have argued for an upstream, economy-wide cap-and-trade scheme as the primary tool for achieving the required reduction in greenhouse gas (GHG) emissions. This paper addresses that argument and concludes that cap-and-trade will need to be accompanied by complementary regulatory measures. While it is a necessary component in a climate mitigation programme, it is unlikely to be sufficient by itself to accomplish the desired emission reductions. The paper reviews the evidence on how SO 2 emissions were reduced and the extent to which actual emission trading was responsible for the reduction as opposed to other innovations. It also identifies differences between the past regulation of SO 2 and other air pollutants and the challenges presented by the regulation of GHG emissions. What actually happened in the US with SO 2 emission trading deviated in several significant respects from what would be predicted based on the conventional theoretical analysis. While there was a dramatic reduction in SO 2 emissions, it occurred because of several factors, some of which are unlikely to apply for GHG emissions, and others of which argue for an activist regulatory policy by the government as a complement to the functioning of an emissions market for GHGs. Copyright 2010, Oxford University Press.

The paper reviews the history of Bay-Delta decision-making in California in order to highlight the continuity between what happened with CALFED and what happened in the preceding decades since water project deliveries began in 1949. Throughout this period, there has been intense conflict about whether and how to transfer water from the Bay-Delta to users elsewhere—a conflict marked by a fundamental opposition of interests among stakeholders. We document how the State of California has failed to organize itself effectively to resolve this conflict and make a decision on how to manage the Delta. The strategy consistently adopted by the State was to encourage the main parties – agricultural and urban water diverters, and fisheries and other instream-protection interests – to work out a solution among themselves, rather than imposing one externally. However, economic theory suggests that a bargaining solution is unlikely to exist because of the extreme opposition of interest among the parties. The Bay-Delta history amply confirms this theoretical prediction. Thus, the State's strategy of relying on voluntary agreement to resolve the issue is fundamentally misconceived and is, at some level, an abdication of its responsibility.

Among others who point to environmental variability and managerial uncertainty as causes of fishery collapse, Roughgarden and Smith (Proc. Natl. Acad. Sci. 93 (1996) 5078) argue that three sources of uncertainty are important for fisheries management: variability in fish dynamics, inaccurate stock size estimates, and inaccurate implementation of harvest quotas. We develop a bioeconomic model with these three sources of uncertainty, and solve for optimal escapement based on measurements of fish stock in a discrete-time model. Among other results we find: (1) when uncertainties are high, we generally reject the constant-escapement rule advocated in much of the existing literature, (2) inaccurate stock estimation affects policy in a fundamentally different way than the other sources of uncertainty, and (3) the optimal policy leads to significantly higher commercial profits and lower extinction risk than the optimal constant-escapement policy (by 42% and 56%, respectively).

This paper establishes several propositions concerning the importance of context in valuing public goods. It first provides necessary and sufficient conditions for the value of a public good to be independent of context. Utility-constant valuation sequences are considered where public goods are systematically made available or taken away. For the case of strict Hicksian substitutes, willingness to pay for an increase in one of the public goods is strictly decreasing the farther out in a sequence it is valued. For the destruction of public goods the reverse is true for willingness to accept compensation. Sequencing has opposite implications for the assessment of the benefits of providing public goods than for the assessment of the damage from destroying them.

This paper considers the effects for offering a "would-not-vote" option in contingent valuation (CV) questions framed using the referendum format. This approach arises from a suggestion made by the National Oceanic and Atmospheric Administration's (NOAA) panel on contingent valuation. The NOAA panel was asked to evaluate the use of this method for estimating the economic value of nonmarketed environmental resources in the context of natural resource damage assessments. This test used the CV questionnaire developed for the study of the Exxon Valdez oil spill conducted by the State of Alaska with in-person interviews. The findings suggest that when those selecting the "would-not-vote" response are treated as having voted "against" the program (a conservative coding), offering this option does not alter (1) the distribution of "for" and "against" responses (2) the estimates of willingness to pay derived from these choices, or (3) the construct validity of the results. © 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

To study the validity of survey-based contingent value estimates, Bishop and Heberlein (1979) compared people's stated and real willingness to accept (WTA) for hunting permits. This paper reconsiders the econometric issue of estimating their referendum mo

Fisher et al. (2012) (hereafter, FHRS) have uncovered coding and data errors in our paper, Deschenes and Greenstone ( 2007) (hereafter, DG) . We acknowledge and are embarrassed by these mistakes. We are grateful to FHRS for uncovering them. We hope that this Reply will also contribute to advancing the literature on the vital question of the impact of climate change on the US agricultural sector. FHRS’ main critiques of DG are as follows: (i) there are errors in the weather data and climate change projections used by DG; (ii) the climate change projections are based on the Hadley 2 model and scenarios, rather than the more recent Hadley 3 model and scenarios; (iii) standard errors are biased due to spatial correlation; (iv ) the inclusion of state by year fixed effects does not leave enough weather variation to obtain meaningful estimates of the relationship between agriculture profits and weather; (v) storage and inventory adjustment in response to yield shocks invalidate the use of annual profit data; and (vi) FHRS argue that a better-specified hedonic model produces robust estimates, unlike the results reported in DG. Four of these critiques have little basis and we respond to them here in the introduction. Specifically, with respect to: (ii) The more recent daily climate predictions were not available when we wrote DG. Nevertheless, the most important issue is providing the reliable estimates of climate change and in this note we report estimates based on the climate model we used in DG and a more recent one that we gained access to in the meantime. (iii) In the primary table on agricultural profits, DG reports two sets of standard errors with the first clustered at the county level and the second based on a variance-covariance matrix that accounts for spatial correlation, using the method proposed in Conley (1999). Thus, the claim of FHRS 2012 seems overblown. Nevertheless, to ease comparisons of papers in this literature, this note will adopt the FHRS convention of reporting estimated standard errors clustered at the county and state levels; we find that inference is largely unaffected by the choice between these different assumptions about the variance-covariance matrix.

While market approaches are clearly valuable for improving U.S. environmental policy, they cannot solve all of the problems, and not necessarily the most difficult ones. They can ensure that a given total abatement is achieved at minimum cost. But, if pollution damages depend on how abatement effort is allocated among polluters, this is not necessarily the most desirable outcome. One also needs to be sure that the potential gains from trade implicit in market solutions will actually be realized within some given time; the empirical evidence here is not necessarily promising. Rather than how aggregate abatement should be distributed among polluters, the chief difficulty often lies in determining how much overall abatement is required. A key factor that economists tend to overlook is the difficulty of ascertaining just how benefits vary with abatement effort. Uncertainty and risk aversion in connection with the marginal benefit curve may explain regulatory actions that are otherwise hard to justify.

Buildings are crucial to control present and future energy demand and, therefore, greenhouse gas concentrations in the atmosphere. In this chapter we suggest that, due to a number of general and specific barriers to the implementation of energy efficiency in buildings, energy prices and conventional energy and environmental policy instruments may not achieve the desired outcomes. Instead, we suggest a novel package of complementary measures that can simultaneously tackle the problems of imperfect information, split incentives among agents, uncertainty about cost and limited access to capital. The proposed policy package is defined around energy certification of buildings, uses flexible building codes, smart metering and employs a new tax on energy inefficiency to foster continuous incentives towards energy efficiency improvements and to provide revenues for an energy efficiency fund that provides capital to firms and poor households.

The ability to place a monetary value on the consequences of pollution discharges is a cornerstone of the economic approach to the environment. If this cannot be done, it undercuts the use of economic principles, whether to determine the optimal level of pollution or to implement this via Pigouvian taxes or Coase-style liability rules. Sometimes, the valuation involves a straightforward application of methods for valuing market commodities, as when sparks from a passing train set fire to a wheat field. Often, however, the valuation is more difficult. Outcomes such as reducing the risk of human illness or death, maintaining populations of native fish in an estuary, or protecting visibility at national parks are not themselves goods that are bought and sold in a market. Yet, placing a monetary value on them can be essential for sound policy. The lack of a market to generate prices for such outcomes is no accident. Markets are often missing in such cases because of the nonexcludable or nonrival nature of the damages: for those affected by it, pollution may be a public good (or bad). The public good nature of the damages from pollution has several consequences. It explains, for example, why the damages are sometimes large—only a few people may want to own a sea otter pelt, say, but many may want this animal protected in the wild. It also explains why market prices are inappropriate measures of value. In the presence of externalities , market transactions do not fully capture preferences. Collective choice is the more relevant paradigm. This is precisely what Ciriacy-Wantrup (1947) had in mind when he first proposed the contingent valuation method. Individuals should be interviewed

In practice, complete demand systems are not estimated. Rather, either an incomplete demand system is estimated, or separability is invoked and a partial demand system is estimated. This paper considers the relationship between the conventional compensating variation (equivalent variation) and the corresponding welfare measure that can be derived from a partial demand system and the current budget allocation to the separable group. Even assuming the separability assumption invoked is appropriate, these partial measures provide, in general, only a limited amount of information about the compensating variation and no information about the equivalent variation. Great care is therefore needed when using partial welfare measures to evaluate policy.

This paper focuses on two specific issues in the design of a domestic cap and trade program for GHGs – whether the cap should be located upstream or downstream, and whether trading alone will suffice to achieve the desired reduction in GHGs or will need to be supplemented with additional regulatory measures. The paper argues for a downstream cap accompanied by measures such as a renewable portfolio standard, efficiency standards for vehicles, appliances and buildings, and a low carbon fuel standard. For this argument, it is necessary to address both the theory and the empirical evidence of emission trading. After reviewing the theory, the paper examines the actual experience in the U.S. with emission trading for SO 2 , to see whether the assumptions used in the theory actually applied in practice. What actually happened deviated in several important respects from what was supposed to happen according to the conventional theorizing. The design of a cap and trade program for GHG is then discussed, first considering the similarities between the past regulation of air pollutants and the challenge posed by GHGs, and then making the case for a downstream cap and complementary policies.

This paper (and the large study behind it) was in some ways a labor of love. We set out to build a discrete choice model to predict recreational fishing behavior that would extend the literature along several dimensions. our interest in doing so stemmed from earlier work that we were individually or collectively involved in. hanemann’s dissertation (1978)1 suggested the power of the discrete choice random utility model (RUM) to look at a large set of recreational alternatives, in this case beaches in the Boston area, and identify the role that attributes like water quality played in consumer choice behavior.2 Carson worked as a research assistant on a large recreational demand project for Jeff Vaughan and Cliff Russell at Resources for the Future (Vaughan and Russell 1982a,b). This project attempted to expand the travel cost framework to dealing with water quality issues and different types of fishing on a large spatial scale using the 1975 Survey of Hunting, Fishing, and Wildlife-Associated Recreation and a much smaller survey undertaken by the research team aimed at gathering specific information for placing a monetary value on different types of fishing days. The project used a discrete choice framework and had bumped up against both computational limits and limits of what could be estimated using

The statistical efficiency of conventional dichotomous choice contingent valuation surveys can be improved by asking each respondent a second dichotomous choice question which depends on the response to the first question—if the first response is "yes," the second bid is some amount greater than the first bid; while, if the first response is "no," the second bid is some amount smaller. This "double-bounded" approach is shown to be asymptotically more efficient than the conventional, "singlebounded" approach. Using data from a survey of Californians regarding their willingness to pay for wetlands in the San Joaquin Valley, we show that, in a finite sample, the gain in efficiency can be very substantial.

The evaluation of health care programmes is commonly approached with stated preference methods such as contingent valuation or discrete choice experiments. These methods provide useful information for policy decisions involving health regulations and infrastructures for health care. However, econometric modelling of these data usually relies on a number of maintained assumptions, such as the use of the compensatory or random utility maximization rule. On the other hand, health policy issues can raise emotional concerns among individuals, which might induce other types of choice behaviour. In this paper we consider potential deviations from the general compensatory rule, and how these deviations might be explained by the emotional state of the subject. We utilized a mixture econometric model which allows for various potential decisions rules within the sample, such as the complete ignorance, conjunctive rule and satisfactory rules. The results show that deviations from the full linear compensatory decision rule are predominant, but they are significantly less observed for those subjects with a medium emotional state about the issue of caring for the health state of the elderly. The implication is that the emotional impact of health policy issues should be taken into account when making assumptions of individual choice behaviour in health valuation methods.

A new method for estimating the demand curve for publicly supplied goods when quantities are restricted to a few discrete levels is introduced. The method involves fitting a conditional logit model to choices from a set of survey options in which price and quantity are both varied and consumer attitudes are explicitly controlled. The estimated parameters of the valuation function serve to trace the marginal value of the good at each level of hypothetical consumption in survey data. We apply the method to the valuation of salmon on Alaska's Kenai River. We find that there is a distinct kink in the marginal valuation function and that sport fishermen may place a negative marginal value on fish permits exceeding their desired catch levels.

In this paper, the authors provide a theoretical review of option value and its relationship to a more familiar concept in decision analysis, the value of information. They further show how option value might be measured with the aid of a partly realistic and partly hypothetical example. The authors also consider how contingent valuation techniques might be used to estimate option value. Copyright 1990 by Oxford University Press.

We estimate the price elasticity of water demand with household-level data, structurally modeling the piecewise-linear budget constraints imposed by increasing block pricing. We develop a mathematical expression for the unconditional price elasticity of demand under increasing block prices and compare conditional and unconditional elasticities analytically and empirically. We test the hypothesis that price elasticity may depend on price structure, beyond technical differences in elasticity concepts. Due to the possibility of endogenous utility price structure choice, observed differences in elasticity across price structures may be due either to a behavioral response to price structure, or to underlying heterogeneity among water utility service areas.

This paper explains the economic conception of water - how economists think about water. It consists of two main sections. First, it reviews the economicconcept of value, explains how it is measured, and discusses how this has been applied to water in various ways. Then it considers the debate regarding whether or not water can, or should, be treated as an economic commodity, and discusses the ways in which water is the same as, or different than, other commodities from an economic point of view. While there are some distinctive emotive and symbolic features of water, there are also some distinctive economic features that make the demand and supply of water different and more complex than that of most other goods.

Value estimates for environmental goods can be obtained by either estimating preference parameters as “revealed” through behavior related to some aspect of the amenity or using “stated” information concerning preferences for the good. In the environmental economics literature the stated preference approach has come to be known as “contingent valuation” as the “valuation” estimated obtained from preference information given the respondent is said to be “contingent” on the details of the “constructed market” for the environmental good put forth in the survey. Work on contingent valuation now typically comprises the largest single group of papers at major environmental economics conferences and in several of the leading journals in the field. As such, it is impossible to “review” the literature per se or even cover all of the major papers in the area in some detail. Instead, in this chapter we seek to provide a coherent overview of the main issues and how they fit together. The organization of the chapter is as follows. First, we provide an overview of the history of contingent valuation starting with its antecedents and foundational papers and then trace its subsequent development using several broad themes. Second, we put forth the theoretical foundations of contingent valuation with particular emphasis on ties to standard measures of economic welfare. Third, we look at the issue of existence/passive use considerations. Fourth, we consider the relationship of contingent valuation to information on preferences that can be obtained by observing revealed behavior and how the two sources of information might be combined. Fifth, we look at different ways in which preference information can be elicited in a CV survey, paying particular attention to the incentive structure posed by different elicitation formats. Sixth, we turn to econometric issues associated with these different elicitation formats. Seventh, we briefly consider survey design issues. Eighth, we look at issues related to survey administration and extrapolating the results obtained to the population of interest. Ninth, we describe the major controversies related to the use of contingent valuation and summarize the evidence. Finally, we provide some thoughts on where we think contingent valuation is headed in the future.

We estimate the price elasticity of water demand with household-level data, structurally modeling the piecewise-linear budget constraints imposed by increasing-block pricing. We develop a mathematical expression for the unconditional price elasticity of demand under increasing-block prices and compare conditional and unconditional elasticities analytically and empirically. We test the hypothesis that price elasticity may depend on price structure, beyond technical differences in elasticity concepts. Due to the possibility of endogenous utility price structure choice, observed differences in elasticity across price structures may be due either to a behavioral response to price structure, or to underlying heterogeneity among water utility service areas.

Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach. Wolfram Schlenker, W. Michael Hanemann, and Anthony C. Fisher ∗ There has been a lively debate about the potential impact of global climate change on U.S. agriculture. Most of the early agro-economic studies predict large damages (see, for example, Richard M. Adams, 1989; Harry M. Kaiser et al., 1993; and Adams et al., 1995). In an innovative paper Robert Mendelsohn, William D. Nordhaus and Daigee Shaw (1994) - hereafter MNS - propose a new approach: using the variation in temperature and precipitation across U.S. counties to estimate a reduced form hedonic equation with the value of farmland as the dependent variable. A change in temperature and/or precipitation is then associated with a change in farmland value which can be interpreted as the impact of climate change. Adams et al. (1998) characterize the hedonic approach as a spatial analogue approach, and acknowledge that ”the strength of the spatial analogue approach is that structural changes and farm responses are implicit in the analysis, freeing the analyst from the burden of estimating the effects of climate change on particular region-specific crops and farmer responses.” On the other hand, one of the potential disadvantages of the hedonic approach is that it is a partial equilibrium analysis, i.e., agricultural prices are assumed to remain constant. 1 While year-to-year fluctuations in annual weather conditions certainly have the potential to impact current commodity prices, especially for crops produced only in a relatively localized area, (such as citrus fruits which are grown mainly in California and Florida), changes in long-run weather patterns (i.e., changes in climate) might have a smaller effect on commodity prices because of the greater potential for economic adaptation, particularly shifts in growing regions. 2 The hedonic approach as implemented by MNS predicts that existing agricultural land on average might be more productive and hence result in benefits for U.S. farmers. 3 The hedonic approach has received considerable attention in our judgment in part because the conclusions are at variance with those of some other studies

In this chapter the choices made by respondents in the main survey are used to construct a lower-bound estimate of the ex ante total value for preventing the expected harm from oil spills along the California Central Coast over the next decade. The relationships between the choice measure and other respondent characteristics measured by the survey are also examined. Section 6.2 presents two versions of the choice measure. Section 6.3 discusses the non-parametric (Turnbull, 1976) statistical framework used in much of our analysis of the estimate of ex ante total value. Section 6.4 provides the Turnbull lower bound estimate on the sample mean1 and examines the sensitivity of this estimate to various assumptions regarding the treatment of the data. Using the categories suggested by the NOAA Panel2 as a framework, section 6.5 examines the bivariate relationships between choice measures and respondent characteristics. Section 6.6 examines construct validity using a multivariate counterpart to the evaluations of individual variables reported in the prior section. Section 6.7 provides a sensitivity analysis that looks at possible shifts in value related to respondent assumptions at variance with key scenario features. Finally, section 6.8 presents the most conservative treatment of the respondents who said that they did not pay California income taxes and its impact on the total value estimate.

In many areas of the world, including large parts of the United States, scarce water supplies are a serious resource and environmental concern. The possibility exists that water is being used at rates that exceed what would be dictated by efficiency criteria, particularly when externalities are taken into account. Because of this, much attention has been paid by policy makers and others to the use of demand management techniques, including requirements for the adoption of specific technologies and restrictions on particular uses. A natural question for economists to ask is whether price would be a more cost-effective instrument to facilitate water demand management. As a first step in such an investigation, this paper draws upon a newly-available set of detailed data to estimate econometrically the demand function for household use of urban water supplies. We analyze cross-sectional time-series data that track 1,082 single-family households served by 16 water utilities in 11 urban areas in the United States and Canada. Because of the diverse multiple-block pricing structures that abound, estimating the effects of price and price structure on residential water demand poses some challenging and interesting problems. We find that the sensitivity of residential water demand to price is quite low, and that the effect of price structure may be more influential than the magnitude of marginal price itself. The household-level data we use allow us to assess the influences on residential water demand of climate, sociodemographic factors, and characteristics of housing stock, including home vintage. Our results indicate substantial heterogeneity in likely household responses to utility demand-management policies.

Although the double-bound (DB) format for the discrete choice contingent valuation method (CVM) has the benefit of higher efficiency in welfare benefit estimates than the single-bound (SB) discrete choice CVM, it has been subject to criticism due to evidence that some of the responses to the second bid may be inconsistent with the responses to the first bid. As a means to reduce the potential for response bias on the follow-up bid in multiple-bound discrete choice formats such as the DB model while maintaining much of the efficiency gains of the multiple-bound approach, we introduce the one-and-one-half-bound (OOHB) approach and present a real-world application. In a laboratory setting, despite the fact that the OOHB model uses less information than the DB approach, the efficiency gains in moving from SB to OOHB capture a large portion of the gain associated with moving from SB to DB. Utilizing distribution-free seminonparametric estimation techniques on a split-survey data set, our OOHB estimates demonstrated higher consistency with respect to the follow-up data than the DB estimates and were more efficient as well. Hence, OOHB may serve as a viable alternative to the DB format in situations where follow-up response bias may be a concern. © 2002 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

In 1992 the National Oceanic and Atmospheric Administration (NOAA) convened a panel of prominent social scientists to assess the reliability of natural resource damage estimates derived from contingent valuation (CV). The product of the Panel's deliberations was a report that laid out a set of recommended guidelines for CV survey design, administration, and data analysis. One of the Panel's recommendations was that CV surveys should employ a referendum approach. This method describes a choice mechanism that asks each respondent how they would vote if faced with a particular program and the prospect of paying for the program through some means, such as higher taxes. The Panel also recommended that CV referendum questions which commonly use only "for" or "against" answers should be expanded to explicitly offer an "I would-not-vote" response. The purpose of this paper is to consider the effects of such a "would-not-vote" option. In developing the test, we followed the important elements of the NOAA Panel guidelines for the design and administration of a CV survey and use what was acknowledged(by the Panel) as the most carefully developed CV questionnaire to that time, that is, the State of Alaska's study of the Exxon Valdez oil spill. Our findings suggest that when those selecting the "would not-vote" response are treated as having voted "against" the offered program, offering the option does not alter: (a) the distribution of "for" and "against" responses, (b) the estimates of WTP derived from these choices, or (c) the construct validity of the results.

The past few years have seen a highly charged debate about whether contingent valuation (CV) surveys can provide valid economic measures of people's values for environmental resources. In an effort to appraise the validity of CV measures of economic value, a distinguished panel of social scientists, chaired by two Nobel laureates, was established by NOAA, to critically evaluate the validity of CV measures of nonuse value. The Panel provided an extensive set of guidelines for CV survey construction, administration, and analysis, and distinguished a subset of items from their guidelines for special emphasis and described them as burden of proof requirements. Of particular interest was the Panel's requirement that CV surveys demonstrate responsiveness to the scope of the environmental insult. That demonstration has come to be called a scope test. The paper reports the findings from the first CV study that adheres to the NOAA Panel's guidelines and includes a formal scope test.