Welfare Economics for Price Changes

Abstract

The phrase environmental valuation has come to be applied to the practice of evaluating the social gains and losses from environmental degradation or improvement. Economists practice valuation by applying welfare economics to environmental outcomes. There is, of course, a good deal of debate as to what is meant by valuation, particularly among the broader science community. Evaluation of benefits and costs often evokes strong objections, even when applied in the well-defined context of welfare economics. Because the objections have an even greater propensity to emerge in environmental applications, the principles of applied welfare economics deserve a quick reminder. This chapter reviews the theory of welfare measurement, but as with the entire book, the ultimate empirical application remains foremost in our minds. The methods for recovering the welfare measures we seek (or good approximations of them) are indirect and will depend on careful reasoning and sound econometrics. Although the importance of the econometric details can not be underestimated, in this book we focus on the logic that connects behavior with estimation.¹

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