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Coping with Preference Anomalies in Cost–Benefit Analysis: A Market-Simulation Approach

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  • Robert Sugden

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Abstract

This paper proposes a methodological strategy for cost–benefit analysis (CBA) which does not require the assumption that individuals’ preferences satisfy standard coherence conditions, and so renders CBA immune to the problems generated by preference anomalies. The proposal treats CBA as an exercise in market simulation, based on the measurement of surplus. Anomalies occur when surplus measurements vary according to the hypothetical payment mechanism used. In such cases, the mechanism that is the “closest market analogue” should be used. This approach is used to resolve problems associated with some familiar anomalies, including inconsistencies between “citizen” and “consumer” valuations, and endowment effects. Copyright Springer 2005

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File URL: http://hdl.handle.net/10.1007/s10640-005-6031-5
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 32 (2005)
Issue (Month): 1 (09)
Pages: 129-160

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Handle: RePEc:kap:enreec:v:32:y:2005:i:1:p:129-160

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: anomalies; cost–benefit analysis; market simulation;

References

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  1. Bardsley, Nicholas & Sugden, Robert, 2006. "Human nature and sociality in economics," Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier.
  2. Jack Knetsch, 2005. "Gains, Losses, and the US-EPA Economic Analyses Guidelines: A Hazardous Product?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(1), pages 91-112, 09.
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Citations

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Cited by:
  1. Elvik, Rune, 2013. "Paradoxes of rationality in road safety policy," Research in Transportation Economics, Elsevier, vol. 43(1), pages 62-70.
  2. Jette Jacobsen & John Boiesen & Bo Thorsen & Niels Strange, 2008. "What’s in a name? The use of quantitative measures versus ‘Iconised’ species when valuing biodiversity," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(3), pages 247-263, March.
  3. James K. Hammitt, 2013. "Positive versus Normative Justifications for Benefit-Cost Analysis: Implications for Interpretation and Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 7(2), pages 199-218, July.
  4. Kenneth Gillingham & Karen Palmer, 2014. "Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(1), pages 18-38, January.
  5. Timothy C. Haab & Matthew G. Interis & Daniel R. Petrolia & John C. Whitehead, 2013. "From Hopeless to Curious? Thoughts on Hausman's 'Dubious to Hopeless' Critique of Contingent Valuation," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 35(4), pages 593-612.
  6. Jose-Luis Pinto-Prades & Jose-Maria Abellan-Perpiñan, 2012. "When normative and descriptive diverge: how to bridge the difference," Social Choice and Welfare, Springer, vol. 38(4), pages 569-584, April.
  7. Gowdy, John M., 2007. "Toward an experimental foundation for benefit-cost analysis," Ecological Economics, Elsevier, vol. 63(4), pages 649-655, September.
  8. Fredrik Carlsson & Peter Martinsson, 2008. "How Much is Too Much?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(2), pages 165-176, June.
  9. Loomes, Graham, 2006. "(How) Can we value health, safety and the environment?," Journal of Economic Psychology, Elsevier, vol. 27(6), pages 713-736, December.

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