Abstract
This chapter provides an overview of the theoretical foundations of nonmarket valuation. The chapter first develops a model of individual choice where private goods are freely chosen but environmental goods are rationed from the individual’s perspective. The model is used to define compensating and equivalent welfare measures for changes in prices and environmental goods. These welfare measures form the basis of the environmental values researchers seek to measure through nonmarket valuation. The chapter discusses the travel cost model with and without weak complementarity, the household production model, the hedonic model, and the general concept of passive-use value. The individual choice model is extended to a dynamic framework and separately to choice under uncertainty. Finally the chapter develops welfare measures associated with averting expenditures and random utility models.
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Notes
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One can choose goods that have environmental quality attributes, e.g., air quality and noise. These goods are rationed in the sense that an individual cannot unilaterally improve ambient air quality or noise level at his or her current house. One can move to a new location where air quality is better but cannot determine the level of air quality at his or her current location.
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It may be the case that one has to pay for \(Q^{0}\). Rather than including this payment in the budget constraint, he or she can simply consider income to already be adjusted by this amount. Because the levels of the nonmarket goods are not individually chosen, there is no need to include payments for nonmarket goods in the budget constraint.
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To clarify notation, \(p \cdot X = p_{1} x_{1} + p_{2} x_{2} + \cdots + p_{n} x_{n} ,\) where p i is the price of market good i.
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Interest over the difference in size between C and E has received considerable attention. For price changes, Willig (1976) provided an analysis. For quantity changes, see Randall and Stoll (1980) and Hanemann (1991). Hanemann (1999) provided a comprehensive and technical review of these issues. From the perspective of measurement, there is a general consensus that it is more difficult to measure E, particularly in stated preference analysis.
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Roy’s identity states that the derivative of the expenditure function with respect to price i is simply the Hicksi demand for good i. The fundamental theorem of calculus allows one to write the difference of two differentiable functions as the integral over the derivative of that function.
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An example is the case of weak substitutability provided in Feenberg and Mills (1980).
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In discussing trends, Krutilla (1967) gave the example of the evolution from a family that car camps to a new generation of backpackers, canoe cruisers, and cross-country skiers.
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The terms “option value,” “preservation value,” “stewardship value,” “bequest value,” “inherent value,” “intrinsic value,” “vicarious consumption value,” and “intangible value” have been used to describe passive-use values. Carson et al. (1999) noted that these are motivations rather than distinct values.
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The special case where g(X, Q) = g(X) has been referred to as “the hopeless case” because the ordinary demands are independent of the levels of Q, leaving no hope for recovering the value of Q from demand data.
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Dividing passive-use value into bequest value, existence value, and the like will provide similarly inconclusive results. The decompositions will not be unique.
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Maler et al. (1994) similarly defined use values as those values that rely on observed market behavior for inference.
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Time is an important dimension, and uncertainty transcends time. However, there is not enough space to cover time and uncertainty together.
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In accordance with standard probability theory, F consists of a sample space of outcomes and a probability law for all subsets of the sample space that satisfies the properties of a probability measure.
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Flores, N.E. (2017). Conceptual Framework for Nonmarket Valuation. In: Champ, P., Boyle, K., Brown, T. (eds) A Primer on Nonmarket Valuation. The Economics of Non-Market Goods and Resources, vol 13. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-7104-8_2
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