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date: 17 August 2017

Life Satisfaction Approach to Environmental Valuation

This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Environmental Science. Please check back later for the full article.

The method and practice of placing monetary values on environmental goods and services for which a conventional market price is otherwise unobservable is one of the most fertile areas of research in the field of natural resource and environmental economics. Initially motivated by the need to include environmental values in benefit-cost analysis, practitioners of non-market valuation have since found further motivation in national account augmentation and environmental damage litigation. Despite hundreds of applications and many decades of refinement, shortcomings in all of the techniques remain, and no single technique is considered superior to the others in all respects. Thus, techniques that expand the suite of options available to the non-market valuation practitioner have the potential to represent a genuine contribution to the field.

One technique to recently emerge from the economics of happiness literature is the “experienced preference method” or “life satisfaction approach.” Simply, this approach entails the inclusion of non-market goods as explanatory variables within micro-econometric functions of life satisfaction, along with income and other covariates. The estimated coefficient for the non-market good yields, first, a direct valuation in terms of life satisfaction, and second, when compared to the estimated coefficient for income, the implicit willingness-to-pay for the non-market good in monetary terms.

The life satisfaction approach offers several advantages over more conventional non-market valuation techniques. For example, the approach does not ask individuals to directly value the non-market good in question, as is the case in contingent valuation. Nor does it ask individuals to make explicit trade-offs between market and non-market goods, as is the case in choice modeling. The life satisfaction approach nonetheless has some potential limitations. Crucially, self-reported life satisfaction must be regarded as a good proxy for an individual’s utility. Furthermore, in order to yield reliable non-market valuation estimates, self-reported life satisfaction measures must: (a) contain information on respondents’ global evaluation of their life; (b) reflect not only stable inner states of respondents, but also current affects; (c) refer to respondents’ present life; and (d) be comparable across groups of individuals under different circumstances. Despite these conditions, there is growing evidence to support the suitability of individual’s responses to life satisfaction questions for non-market valuation. Applications of the life satisfaction approach to the valuation of environmental goods and services to date include the valuation of air quality, airport noise, climate, scenic amenity, floods, and drought.