Contemporary Welfare Economics and Ecological Economics Valuation and Policy

1. Introduction The question of value has been central to economics since its inception as a scientific discipline. The Classical economists thought deeply about the distinction between use value and exchange value and the relationship between human happiness and the market prices of goods and services. With the development of marginal value theory, beginning in the 1870s, the value problem seemed to be solved. The value of something was equal to its marginal utility, that is, to the additional satisfaction derived in consuming one more unit of it. A fundamental relationship in consumer theory is that a consumer maximizing her utility subject to a budget constraint will end up at the point where marginal utility divided by price will be the same for all goods purchased. This is equivalent to maximizing utility subject to a budget constraint. After the marginalist revolution, the valuation problem was reduced to insuring that market prices reflected the "true" social value of the goods and services. Environmental economics became concerned almost exclusively with estimating various kinds of market failure-market power, public goods, and externalities-so that they could be corrected and markets could efficiently allocate society's scarce resources. As welfare economists frame it, the problem with valuing environmental features is that, for the most part, they are not traded in markets. Economists have developed a variety of techniques to place monetary values on environmental features. Most of these, including the widely used contingent valuation method (CVM), are variants of cost benefit analysis, the basic approach of neoclassical environmental economics. Within the system of neoclassical welfare economics, environmental features are relegated to the realm of ordinary commodities. In this system the environment is treated as a commodity in two senses, as an input to the production process and as a commodity giving utility to consumers. As environmental valuation techniques became more sophisticated in the 1970s and 1980s, long-neglected but fundamental questions were raised about the nature of human preferences and value. Ecological economists, ecologists, and social philosophers began to question the characterization of value in neoclassical welfare economics and the treatment of the environment as just another commodity. This scepticism has now spread to the mainstream of the economics profession. When the International Society for Ecological Economics was formed in the late 1980s, its members were by and large alienated from mainstream economics. Building on the work of two heterodox economists, Kenneth Boulding and Nicholas Georgescu-Roegen, ISEE …