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Property prices vary according to the many attributes associated with them. House prices, for example, reflect size, commercial facilities, local infrastructure, and other attributes such as environmental quality of the house location. From statistical analyses of house prices, the contribution of environmental quality to house price variations can be assessed, which is an estimate of how much people are willing to pay for changes in environmental quality. This measure represents a use value for that environmental change from which a demand function can be estimated. The method has been used to value external effects such as noise, air quality, and visibility. The main limitation is that to work efficiently it requires the affected parties to be well informed about the impacts and markets, so that decisions about location can be made freely and easily. For examples of relevant studies see ExternE (1999), Palmquist (1991), and Zabel and Kiel (2000).
By asking people directly how much they are willing to pay for a change in a provision of benefits from an environmental resource, a hypothetical market can be created in which a demand curve for ecological goods and services can be estimated. This method is the only one by which non-use values can be estimated, since hypothetical markets can be created for them. Since it is not based on revealed preferences, on which the other demand approaches are based, contingent valuation may incur in various biases, from strategic answers to lack of information. Such biases are currently well documented and techniques have been developed to reduce them. Contingent valuation methods have been used to value the use and non-use of sites of special significance, health effects (including changes in the risk of death), and damages to ecosystems (Bateman and Willis, 1999). Despite the considerable amount of work on reducing the biases that arise because such data do not report actual transactions, this method arouses considerable scepticism among policymakers and its results are not always accepted.
Nevertheless, although such methods of valuation have problems, there is often no suitable alternative and they provide policymakers with important information for decision-making purposes. As suggested above, both physical impacts and values should be used in this process. In relation to climate change, the estimation of external effects arises primarily in the assessment of damages that result from such change, including those in agriculture, forests, energy use, recreation, and health. In relation to mitigation, the applications are primarily in valuing the impacts of O3, NOx, SOx, particulate matter, and secondary particles. In adaptation, the valuation of external effects arises with respect to loss of land, changes to recreational facilities, and changes to agriculture.
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