Working Paper: NBER ID: w19426
Authors: Michael Greenstone; B. Kelsey Jack
Abstract: Environmental quality in many developing countries is poor and generates substantial health and productivity costs. However, existing measures of willingness to pay for environmental quality improvements indicate low valuations by affected households. This paper argues that this seeming paradox is the central puzzle at the intersection of environmental and development economics: Given poor environmental quality and high health burdens in developing countries, why is WTP so low? We develop a conceptual framework for understanding this puzzle and propose four potential explanations: (1) due to low income levels, individuals value increases in income more than marginal improvements in environmental quality, (2) the marginal costs of environmental quality improvements are high, (3) political economy factors undermine efficient policy-making, and (4) market failures such as weak property rights and missing capital markets drive a wedge between true and revealed willingness to pay for environmental quality. We review the available literature on each explanation and discuss how the framework also applies to climate change, which is perhaps the most important issue at the intersection of environment and development economics. The paper concludes with a list of promising and unanswered research questions for the emerging sub-field of "envirodevonomics."
Keywords: Environmental Quality; Willingness to Pay; Development Economics; Market Failures; Political Economy
JEL Codes: D04; D61; I15; O12; O13; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low income (I32) | low WTP (J17) |
| high marginal costs (D40) | poor environmental conditions (Q53) |
| political economy factors (P19) | suboptimal environmental quality (Q53) |
| market failures (D52) | divergence between true and revealed WTP (D69) |
| low income (I32) | prioritizing immediate consumption (D15) |
| high marginal costs (D40) | ineffective policy implementation (D78) |
| political economy factors (P19) | misalignment between public preferences and policies (D72) |
| market failures (D52) | underinvestment in environmental quality (F64) |