The benefit side is extremely important in assessing environmental projects. There is a large and growing literature on both the economic theory of environmental benefits and the measurement of such benefits. This is hardly surprising given that many of the services provided by the environment are unpriced. There has therefore been a need to derive money measures of utility changes caused by, in particular, various ‘commodities’ that can be viewed as public goods or externalities, and to develop procedures for practical measurement of such money measures. This and the next chapter review these two issues.

In this chapter we start by defining money measures of utility change and discussing their properties. The chapter is structured as follows. Section 3.1 derives the two most frequently used money measures, the compensating and equivalent variations. In section 3.2 their properties, for example how they are related to a utility change, are explored. Section 3.3 looks at the posibility of deriving the value of a public good from market data. Then, in section 3.4, we turn to money measures of complex changes that affect prices, income and environmental quality, and discuss the interpretation of such money measures. The final section of the chapter discusses the so-called path-dependency problem, i.e. the problem that the magnitude of a money measure may depend on the order in which prices etc. are changed. We also discuss the problem faced when decomposing total values into use values and non-use values.

Two money measures of utility change

Consider a household that derives satisfaction from consuming n different private goods and m different public goods.