Heterogeneity in Environmental Demand

Heterogeneity is a defining characteristic of environmental demand studies that use household-level data. People make different choices due to observed and unobserved differences in preferences and constraints, choice elements are quality-differentiated commodities that can be consumed in different ways, and observed characteristics of people are often import for policy. In this review I examine how environmental economists have responded to the challenges and opportunities this heterogeneity implies. I categorize the types of heterogeneity that can be present, provide examples of each, and propose criteria to use in deciding when explicit attention should be paid to the different types. I then show how a variety of economic and econometric models have been used to accommodate the various dimensions of observed and unobserved heterogeneity, and I discuss opportunities for further research on the topic.