Valuing Environmental Resources through Demand for Related Commodities

We examine the revealed preference theory underlying the welfare analysis of public goods (e.g., environmental quality) by observing the consumption of related commodities. Inspired by Larson (1991) and Ebert (1998), and extended from Eom and Larson (2006), an empirical strategy is formulated, consistent with the theory of uniquely deriving use and nonuse values for a change in the public good. We show that the weak complementarity assumption and the Willig condition, the common preference assumptions used to support the revealed preference methods for non-market valuation, may be tested as parameter restrictions. A study of water quality valuation is presented to illustrate the proposed empirical strategy. Results show that the weak complementarity assumption and the Willig condition generally do not hold in the case study, and the consumer surplus derived from the indirect valuation method deviates largely from the exact welfare measures.