Reformulating the foundations of consumer choice theory and environmental valuation

The burgeoning field of environmental valuation has raised serious doubts about the fundamental axioms of consumer choice theory, the general validity of the Walrasian system and methodological individualism. This paper examines these aspects of consumer choice theory, paying particular attention to the pioneering contributions of Georgescu-Roegen. We argue that evidence from psychology, game theory, anthropology and contingent valuation surveys reveals a more complex pattern of decision-making than that described by neoclassical utility theory. We discuss the notions of the invariance of preferences, non-satiation, the principle of complementarity, lexicographic preferences and the hierarchy of wants with reference to environmental valuation. We also discuss the notion of marginal utility of money, the validity of the Walrasian system, and methodological individualism using scaling concept in hierarchy theory. We then address the conflict between theory and reality by introducing a probabilistic binary choice scheme under uncertainty about environmental attributes. We argue that these extensions are necessary to account for consumer choices revealed in environmental valuation surveys. We conclude with the hope that a reformulation of consumer choice theory based on realistic models of human behavior can be the basis for a viable alternative to neoclassical welfare economics. © 2001 Elsevier Science B.V. All rights reserved.