Willingness to pay for environmental goods under uncertainty

In this paper, we value benefits derived from a public environmental good under uncertainty. Most environmental goods (and ecosystem services) are non-market-traded, and benefits from such goods are typically enjoyed under conditions of uncertainty. Uncertainty can arise from several sources, such as environmental (e.g. ecosystem or climate) variability, technological development or institutional change. In this paper, we consider (binary) uncertainty in (i) consumer’s income and (ii) the provision of an environmental good. We use a constant-elasticity-of-substitution (CES) utility function, where utility depends on a market good and an environmental good which is exogenously provided in a fixed quantity. The CES function is nested in a constant-relative-risk-aversion form. We derive the marginal willingness to pay (WTP) for changes in (i) the probability of loss, (ii) the size of loss, and (iii) the current level of the environmental good. We also explore the comparative static properties of marginal WTP.