Working Paper

Cost-Benefit Analysis as Market Simulation: A New Approach to the Problem of Anomalies in Environmental Evaluation

Apr 27, 2007 | Robert Sugden


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.