TABLE 4.1 Advantages and Disadvantages of Selected Methods

Method

Advantages

Disadvantages

Derived demand/production cost estimation techniques

Based on observable data from firms using water as an input or from household consumption.; Firmly grounded in microeconomic theory.; Relatively inexpensive.

Not possible to measure in situ or nonuse values.; Understates WTP.

Cost-of-illness method

Relatively inexpensive.

Omits the disutility associated with illness.; Understates WTP because it overlooks averting costs.; Limited to assessment of the current situation.

Travel cost method (TCM)

Based on observable data from actual behavior and choices.; Relatively inexpensive.

Need for easily observable behavior.; Limited to resource use situations including travel.; Ex post analysis; limited to assessment of the current situation.; Does not measure nonuse values.; Possible sample selection problems and other complications relate to estimate consumer surplus.

Averting behavior method

Based on observable data from actual behavior and choices.; Relatively inexpensive.; Provides a lower bound WTP if certain assumptions are met.

Estimates do not capture full losses from environmental degradation.; Several key assumptions must be met to obtain reliable estimates.; Need for easily observable behavior on averting behaviors or expenditures.; Ex post analysis; limited to assessment of current situation.; Does not estimate nonuse values.

Hedonic pricing method (HPM)

Based on observable and readily available data from actual behavior and choices.

Difficulty in detecting small, or insignificant, effects of environmental-quality factors on housing prices.



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