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Cost-Benefit Analysis as Market Simulation: A New Approach to the Problem of Anomalies in Environmental Evaluation
Robert Sugden
RFF Discussion Paper 07-28 | April 2007
RESEARCH TOPICS:
Abstract
Most normative economics assumes that individuals have coherent preferences. This paper responds to growing evidence of failures of this assumption, particularly in the context of stated-preference methods widely used in environmental policy analysis. I propose a criterion of consumer sovereignty which does not presuppose preference coherence, and which is satisfied by competitive markets. I then propose an approach to cost-benefit analysis that attempts to simulate consumer sovereignty in situations of market failure. The key idea is to use valuations revealed ‘at the moment of consumption’. I argue that this principle is better implemented by hedonic pricing than by contingent valuation.
RELATED SUBTOPICS
Valuation
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