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How should the Environment be Valued

Willingness to Pay (WTP) and Willingness to Accept Compensation (WTAC or just WTC) are the two most widely accepted measures of value in economics. WTP conveys the maximum amount a consumer would be willing to pay for a good while still maintaining the same utility. WTAC is the minimum a consumer would be willing to pass up on consuming that good or dealing with an 'economic bad', all the while having the same level of utility. In the context of environmental economics, this signifies your WTP for an improvement in an environmental good (clean air) or your WTAC in order to forgo such an improvement. It can also mean an individual's WTP to avoid the degradation of an environmental good, or an individual's WTAC in order to put up with such an environmental 'bad' (smog).


It's important to note a few problematic issues with dealing with determining how the environment should be valued:

  • Willingness to Pay and Willingness to Accept Compensation for the same good would ideally be the same amount. However, in real-world applications they aren't often the same, and differences can in fact be quite significant. The reason for this is two-fold. First, if there aren't many good substitutes for a product, one's WTAC in selling the product is higher than the buyer's WTP for the good. The second explanation is psychological: people are less apt to be willing to part with ownership of a good than willing to pay for the same good. This behavior of valuing what you presently have higher than what you could get is a concept known as "loss aversion" (Hanley,36).
  • It's generally conceived as impossible or just impractical to put a value on all of the Earth, as it is infinite or in layman's economic terms, nothing.

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