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

  • Robert Sugden

    ()

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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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
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100263

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  1. 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.
  2. Bardsley, Nicholas & Sugden, Robert, 2006. "Human nature and sociality in economics," Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier.
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