In the case of a commodity that is traded in the market, buyers and sellers reveal their preferences directly through their actions. On the other hand, in the case of public goods and ‘bads’ no such direct revelation mechanism is available. This raises the question of how to overcome the problem of preference revelation. Several different practical methods, which can be used to measure the willingness to pay for public goods (bads), have been suggested in the literature. This chapter presents the most frequently used and/or suggested methods: survey techniques, the Clarke–Groves mechanism, travel costs methods, and hedonic approaches.

Survey data

Direct demand-revealing methods for public goods have been suggested and also used by several authors. Roughly speaking, these approaches collect preference information by asking households how much they are willing to pay for some change in the provision of a public good, or about the minimum compensation households require if the change is not carried out. For example, the following questions may be asked of the respondent:

1. (CV) Suppose the provision of z is increased from z1 to z2. What is the most you would be willing to pay for this increase?

2. (EV) Suppose the government refrains from increasing the provision of z. What is the minimum compensation you would need in order to be as well off as after an increase in z?

These concepts are illustrated graphically in figure 8.1, where an increase in z from z1 to z2 moves the respondent from point A to point B.