These measures rely on prices that indirectly measure the externality’s impact on welfare.
Hedonic Pricing Method:
- The hedonic pricing technique is particularly useful in measuring changes in environmental amenity such as noise or air pollution.
- It involves comparing the prices for residential or agricultural land or properties in areas close to a source of pollution, such as an airport, with those for land in similar suburbs away from such pollution sources.
- Controls are introduced it eliminate differences due to the intrinsic value of the house or land using large samples and econometric regressions.
- The difference in land prices that cannot be explained by any of these other factors will represent the present value of the occupant’s expected loss of environmental amenity by living close to the pollution source
Travel Cost Method:
- This approach can be used to measure both negative externalities like traffic congestion and positive externalities from environmental amenities like national parks or scenic area generally.
- for example, the additional travel time costs of road users, valued in economic prices will provide an estimate of the welfare loss as a result of the unmarketed externality, congestion.
- The basic rationale of this approach is that people will reveal the utility gain from a recreational facility by the amount they are willing to pay to visit it each year.
- The travel cost method can be used to provide a minimum valuation of other unmarketed items like historical and cultural sites.
Contingent Valuation Method
- Sometimes, the externalities created by a project cannot be measured either directly or indirectly in market prices because there is no actual or even surrogate market for the good or service concerned. For rg: Sites of cultural, historical or spiritual importance
- Furthermore, people may get utility or pleasure, from mere knowledge of existence of environmental or cultural amenities even if they have never used or seen them and do not intend to. This utility is called non-use or passive value.
Contingent valuation market methods have therefore been developed to directly ask people what value put on environmental and other amenities, including facilities from which they get only passive value.
Join the conversation