It is well established that people underestimate the distance to objects depicted in virtual environments and two-dimensional (2D) displays. The reasons for the underestimation are still not fully understood. It is becoming more common to use virtual environment displays for driver training and testing and so understanding the distortion of perceived space that occurs in these displays is vital. We need to know what aspects of the display cause the observer to misperceive the distance to objects in the simulated environments. The research reported in this thesis investigated how people estimate distance between themselves and a car in front of them, within a number of differing environmental contexts. Four experiments were run using virtual environment displays of various kinds and a fifth experiment was run in a real-world setting. It was found that distance underestimation when viewing 2D displays is very common, even when familiar objects such as cars are used as the targets. The experiments also verified that people have a greater underestimation of distance in a virtual environment compared to a real-world setting. A surprising and somewhat counterintuitive result was that people underestimate distance more when the scene depicts forward motion of the observer compared to a static view. The research also identified a number of visual features in the display (e.g., texture information) and aspects of the display (e.g., field of view) that affected the perception of distance or that had no effect. The findings should help the designers of driver-training simulators and testing equipment to better understand the types of errors that can potentially occur when humans view two-dimensional virtual environment displays.