The Benefits of Environmental Improvement: Theory and Practice

Environmental Improvement


INTRODUCTION

In 1973 I was asked by Henry Peskin to prepare a paper on the techniques for estimating the benefits of water pollution control for a symposium sponsored by the Environmental Protection Agency. In the course of writing that paper I realized that many of the empirical techniques that were discussed in the economics literature have a common characteristic: they make use of linkage or connection in consumers' preferences and behavior between a public good (water quality in this case) and some private good whose price and quantity can be observed in the market place. Then two years later I was asked to review the state of the art of empirical estimation of air and water pollution control benefits as part of a study conducted by Enviro-Control, Inc. under contract to the Environmental Protection Agency. One of the things I learned from this review was that many--if not most--of the studies on which national estimates were based were flawed conceptually and theoretically. Not only were appropriate data difficult to obtain but what was being measured often did not coincide with the economist's definition of benefits; or the model on which the estimate was based diverged in important ways from accepted economic theory; or, in some cases, no theoretical justification for the estimate was offered.

I concluded from these experiences that practitioners in the field needed a book that would first of all describe the techniques for estimating various forms of benefits, show how they were related to the underlying economic welfare theory, and discuss some of the pitfalls and problems in the empirical implementation of the techniques. This is the book I have tried to write. My intended audience is professional economists and students having a good grasp of microeconomic theory. The notion of writing a laymen's guide to benefit estimation was appealing. But I felt the need first to address a number of technical issues and to provide a unified theoretical treatment. A laymen's guide might better come after the specialists have brought some order and cohesiveness to the subject.

The premises on which this book is based are orthodox in nature. They are the basis of neoclassical welfare theory. Individual preference theory is accepted as the basis for defining and measuring the gains and losses in welfare associated with alternative environmental policies.