A conspectus on valuing the environment

A distinction is drawn between opportunity cost and willingness‐to‐pay (WTP) valuations of the environment and the latter are shown to be appropriate only in situations where no agreed environmental standards exist. WTP measures of environmental effects form the basis of the Pigovian model of externalities. This model is applicable where individuals directly perceive environmental effects as nuisances or the reverse. But with many environmental problems direct perception does not occur and the Pigovian model is not applicable. In these circumstances it is wrong to talk of biases in WTP estimations since no ‘true’ WTP exists. A decision rule grounded in WTP could still be used but is open to serious objections. The preferred approach is through the development of environmental standards.