Thus far we have concentrated on money measures which can be used to assess households' monetary valuation of environmental quality. However, private sector firms also affect and are affected by the current level of environmental health. In the absence of policy instruments which affect firms' behaviour, firms' activities which affect the environment do not show up in their annual accounts (unless firms respond to consumer reactions and voluntarily take action to reduce environmental ‘spillover’ effects). Instead, these effects show up in household utility functions and can be assessed in the way discussed in chapter 3. However, firms are also affected by pollution or the level of environmental quality, for example. This is obviously true for a downstream fishery affected by firms or households upstream polluting the river.

In this chapter, we start by examining how changes in environmental quality affecting a firm can be evaluated. That is, money measures or producer surplus measures are derived. Ultimately, firms are owned by households. This is true even if the direct owner of a firm is a pension fund or the government, for example, since there are households behind these institutions. Changes in profits caused by pollution, for example, therefore affect household welfare, and must be accounted for in an assessment of a project's – say a new pollution treatment plant's – total effects on the whole of society. In section 5.2, general equilibrium cost-benefit rules for a small or marginal environmental project are derived.