(ii) An initial assumption is that all individuals have the same marginal utility of
income. i.e., all individuals acquire the same quantity or extent of increased
utility from a supplementary dollar income. As this is a very strong assumption,
it will have to be modified in many circumstances. However, presently, this
hypothesis of a uniform marginal utility of income permits (a) aggregation
across individuals and (b) the use of prices noted in one sector of the economy
to estimate values on unpriced goods and services in other sectors. Individual
demand curves can be aggregated into market demand curves, either if there is
no change in income distribution or if the income elasticity of demand remains
the same for all individuals.
(iii) In practice, the marginal utility of income generally decreases with income.
Thus, a rich person obtains less extra utility from an extra rupee’s income than
does a poorer individual. As it is difficult to compare utility across individuals,
it is simpler to suppose a constant marginal utility of income. “Weightage” may
be used to avoid the consequences of this hypothesis.
(iv) Total individual welfare (and, consequently, societal welfare) comprises the
sum of expenditures and consumer’s surplus. These components are both
appropriate indicators of welfare and must be measured and incorporated in
the analysis.
(v) Using “willingness to pay” measures need to be moderated by (1) individual
preferences and (2) a weightage coefficient considering the income or some
other criterion.
The consequences of the above assumptions have often been ignored. Project
analyses have generally concentrated on the easily determined direct benefits and
costs (also required in financial analyses) and often overlook the economic externalities - some directly determined from market prices, and others consisting of
losses (or, more rarely, gains) of consumer‘s surplus.
This chapter examines the techniques for assessing environmental externalities in
order to undertake an inclusive social welfare analysis. These are listed in Table 8.1.
8.2 Generally Applicable Techniques
Five, commonly used, generally applicable valuation techniques are presented
below. The choice of the appropriate technique will depend on many parameters
comprising the impact to be evaluated as well as the data, time and financial
resources available. The challenge is to ascertain the environmental impacts of the
projects concerned and to correctly include the assessments of their costs and
benefits when analysing the project.
All the methods presented make use of market prices to define values, with an
underlying assumption, that these prices reveal economic scarcity, and are therefore,
economic efficiency prices. If, resulting from subsidies, taxes, exchange rates, or
mandated wage or interest rates, there are distortions in the market prices, then
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8 Analysis of Environmental Impacts of Infrastructure
income. i.e., all individuals acquire the same quantity or extent of increased
utility from a supplementary dollar income. As this is a very strong assumption,
it will have to be modified in many circumstances. However, presently, this
hypothesis of a uniform marginal utility of income permits (a) aggregation
across individuals and (b) the use of prices noted in one sector of the economy
to estimate values on unpriced goods and services in other sectors. Individual
demand curves can be aggregated into market demand curves, either if there is
no change in income distribution or if the income elasticity of demand remains
the same for all individuals.
(iii) In practice, the marginal utility of income generally decreases with income.
Thus, a rich person obtains less extra utility from an extra rupee’s income than
does a poorer individual. As it is difficult to compare utility across individuals,
it is simpler to suppose a constant marginal utility of income. “Weightage” may
be used to avoid the consequences of this hypothesis.
(iv) Total individual welfare (and, consequently, societal welfare) comprises the
sum of expenditures and consumer’s surplus. These components are both
appropriate indicators of welfare and must be measured and incorporated in
the analysis.
(v) Using “willingness to pay” measures need to be moderated by (1) individual
preferences and (2) a weightage coefficient considering the income or some
other criterion.
The consequences of the above assumptions have often been ignored. Project
analyses have generally concentrated on the easily determined direct benefits and
costs (also required in financial analyses) and often overlook the economic externalities - some directly determined from market prices, and others consisting of
losses (or, more rarely, gains) of consumer‘s surplus.
This chapter examines the techniques for assessing environmental externalities in
order to undertake an inclusive social welfare analysis. These are listed in Table 8.1.
8.2 Generally Applicable Techniques
Five, commonly used, generally applicable valuation techniques are presented
below. The choice of the appropriate technique will depend on many parameters
comprising the impact to be evaluated as well as the data, time and financial
resources available. The challenge is to ascertain the environmental impacts of the
projects concerned and to correctly include the assessments of their costs and
benefits when analysing the project.
All the methods presented make use of market prices to define values, with an
underlying assumption, that these prices reveal economic scarcity, and are therefore,
economic efficiency prices. If, resulting from subsidies, taxes, exchange rates, or
mandated wage or interest rates, there are distortions in the market prices, then
222
8 Analysis of Environmental Impacts of Infrastructure