Modelling winners and losers in contingent valuation of public goods: Appropriate welfare measures and econometric analysis

Contingent valuation is now the most widely used method for valuing non-mar keted goods in cost-benefit analysis. Yet, despite the fact that many exter nalities manifest themselves as costs to some and benefits to others, most studies restrict willingness to pay to being non-negative. This can result in significant errors in policymaking. This paper examines the importance o f this, explores appropriate welfare measures for assessing losses and gain s, demonstrates how these can be elicited explicitly, highlights the sensit ivity of the results of such studies to the econometric specification emplo yed and suggests ways of dealing with it. Finally, the implications for pol icy are examined.