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Valuing the Environment as a Factor of Production

In: Handbook of Environmental Economics

  • McConnell, Kenneth E.
  • Bockstael, Nancy E.

This chapter explores the theory and practice of measuring the economic costs and benefits of environmental changes that influence production, both in the context of firms and of households. The theory uses models of household and firm decision making to map the influence of environmental changes to changes in human welfare. The goal is to measure, by compensating or equivalent changes in incomes, the welfare effects on people, in their roles as owners of firms, owners of factors of production, and consumers. The developing country context is most common for valuing the environment as an input, because agriculture and natural resource extraction are so much more important than in industrialized countries.When households or firms produce goods for sale on the market, and the environment influences the costs of production, we show the circumstances when one can use information embodied in the supply curve of the marketed good or the demand curve for an input into the production of the good to extract welfare measures for environmental change. When the environment affects the cost of production of goods households produce and consume, we show the restrictions on production technology that will permit welfare measure for changes in the environment. We also look at circumstances that permit the calculations of bounds for the exact welfare measures. We explore welfare measurement under a variety of institutional structures, including government support for agricultural commodities and open-access fisheries. Exact welfare measurement makes extensive demands for data. Because these demands are not often met in practice, researchers resort to a variety of approximations of welfare measures. We assess these approximations, comparing them with the more exact measures.

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This chapter was published in:
  • K. G. Mäler & J. R. Vincent (ed.), 2006. "Handbook of Environmental Economics," Handbook of Environmental Economics, Elsevier, edition 1, volume 2, number 2, June.
  • This item is provided by Elsevier in its series Handbook of Environmental Economics with number 2-14.
    Handle: RePEc:eee:envchp:2-14
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    17. Paul M. Jakus, 1994. "Averting Behavior in the Presence of Public Spillovers: Household Control of Nuisance Pests," Land Economics, University of Wisconsin Press, vol. 70(3), pages 273-285.
    18. Bartik, Timothy J., 1988. "Evaluating the benefits of non-marginal reductions in pollution using information on defensive expenditures," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 111-127, March.
    19. Garcia, Philip & Dixon, Bruce L. & Mjelde, James W. & Adams, Richard M., 1986. "Measuring the benefits of environmental change using a duality approach: The case of ozone and Illinois cash grain farms," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 69-80, March.
    20. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-97, September.
    21. Harrington, Winston & Krupnick, Alan J. & Spofford, Walter Jr., 1989. "The economic losses of a waterborne disease outbreak," Journal of Urban Economics, Elsevier, vol. 25(1), pages 116-137, January.
    22. Freeman, A. III, 1991. "Valuing environmental resources under alternative management regimes," Ecological Economics, Elsevier, vol. 3(3), pages 247-256, September.
    23. Lynne, Gary D. & Conroy, Patricia & Prochaska, Frederick J., 1981. "Economic valuation of marsh areas for marine production processes," Journal of Environmental Economics and Management, Elsevier, vol. 8(2), pages 175-186, June.
    24. Mendelsohn, Robert & Nordhaus, William D & Shaw, Daigee, 1994. "The Impact of Global Warming on Agriculture: A Ricardian Analysis," American Economic Review, American Economic Association, vol. 84(4), pages 753-71, September.
    25. Edward Barbier & Ivar Strand, 1998. "Valuing Mangrove-Fishery Linkages – A Case Study of Campeche, Mexico," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(2), pages 151-166, September.
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