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The Assumption of Equal Marginal Utility of Income: How Much Does it Matter?

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In most applied cost-benefit analyses, individual willingness to pay is aggregated without using explicit welfare weights. This can be justified by postulating a utilitarian social welfare function, along with the assumption of equal marginal utility of income for all individuals. However, since marginal utility is a cardinal concept, there is no generally accepted way to verify the plausibility of this latter assumption, nor its empirical importance. In this paper we use data from seven contingent valuation studies to illustrate that if one instead assumes equal marginal utility of the public good for all individuals, aggregate monetary benefit estimates change dramatically.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 241.

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Date of creation: Nov 1998
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Handle: RePEc:ssb:dispap:241

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Keywords: Utility comparisons; environmental valuation; cost-benefit analysis; choice of numeraire;

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References

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  1. Vatn Arild & Bromley Daniel W., 1994. "Choices without Prices without Apologies," Journal of Environmental Economics and Management, Elsevier, vol. 26(2), pages 129-148, March.
  2. Langford, Ian H. & Bateman, Ian J., 1996. "Elicitation and truncation effects in contingent valuation studies," Ecological Economics, Elsevier, vol. 19(3), pages 265-267, December.
  3. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
  4. Medin, Hege & Nyborg, Karine & Bateman, Ian, 2001. "The assumption of equal marginal utility of income: how much does it matter?," Ecological Economics, Elsevier, vol. 36(3), pages 397-411, March.
  5. Hammond,Peter, 1988. "Theoretical progress in public economics: A provocative assessment," Discussion Paper Serie A 171, University of Bonn, Germany.
  6. Nyborg, Karine, 2000. "Project analysis as input to public debate: Environmental valuation versus physical unit indicators," Ecological Economics, Elsevier, vol. 34(3), pages 393-408, September.
  7. van Praag, Bernard M. S., 1991. "Ordinal and cardinal utility : An integration of the two dimensions of the welfare concept," Journal of Econometrics, Elsevier, vol. 50(1-2), pages 69-89, October.
  8. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
  9. Brekke, Kjell Arne, 1997. "The numeraire matters in cost-benefit analysis," Journal of Public Economics, Elsevier, vol. 64(1), pages 117-123, April.
  10. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
  11. Carson, Richard T, 1999. "Contingent Valuation: A User's Guide," University of California at San Diego, Economics Working Paper Series qt2mw607q7, Department of Economics, UC San Diego.
  12. Unsworth, Robert E. & Bishop, Richard C., 1994. "Assessing natural resource damages using environmental annuities," Ecological Economics, Elsevier, vol. 11(1), pages 35-41, September.
  13. I J Bateman & I H Langford, 1997. "Budget-constraint, temporal, and question-ordering effects in contingent valuation studies," Environment and Planning A, Pion Ltd, London, vol. 29(7), pages 1215-1228, July.
  14. Bromley, Daniel W., 1990. "The ideology of efficiency: Searching for a theory of policy analysis," Journal of Environmental Economics and Management, Elsevier, vol. 19(1), pages 86-107, July.
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Citations

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Cited by:
  1. Hege Medin & Karine Nyborg & Ian Bateman, 1998. "The Assumption of Equal Marginal Utility of Income: How Much Does it Matter?," Discussion Papers 241, Research Department of Statistics Norway.
  2. Pascal Gastineau & Emmanuelle Taugourdeau, 2012. "Which compensation for whom ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00768884, HAL.
  3. Gastineau, Pascal & Taugourdeau, Emmanuelle, 2014. "Compensating for environmental damages," Ecological Economics, Elsevier, vol. 97(C), pages 150-161.
  4. Kant, Shashi, 2003. "Extending the boundaries of forest economics," Forest Policy and Economics, Elsevier, vol. 5(1), pages 39-56, January.
  5. Scarborough, Helen & Bennett, Jeffrey W., 2006. "Estimating intergenerational utility distribution preferences," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139899, Australian Agricultural and Resource Economics Society.
  6. Helen Scarborough & Jeff Bennett & Rodney Carr, 2004. "Using Choice Modeling to Investigate Equity Preferences," Economics Series 2004_03, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  7. Helen Scarborough & Jeff Bennett, 2006. "Estimating Intergenerational Distribution Preferences Using Choice Modelling," Economics Series 2006_26, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  8. repec:hal:journl:halshs-00768884 is not listed on IDEAS
  9. Pascal Gastineau & Emmanuelle Taugourdeau, 2013. "Compensating for environmental damages," EconomiX Working Papers 2013-21, University of Paris West - Nanterre la Défense, EconomiX.
  10. Scarborough, Helen & Bennett, Jeff, 2008. "Estimating intergenerational distribution preferences," Ecological Economics, Elsevier, vol. 66(4), pages 575-583, July.

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