Theoretical Basis for Measuring Social Costs

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Appendix B. Theoretical basis for measuring social costs In order to analyze cases where a change in environmental quality (q) affects individual preference and demand, a basic individual utility maximization problem is considered i.e., maximizing a strictly concave utility function subject to the compact (closed and bounded) budget set (Freeman 2003): Maximize┬(x_j )⁡〖u(x,q)〗 subject to y = ∑_(j=1)^n▒p_j x_j (B-1) where u is individual’s utility, x is a vector of private goods quantities x = (x_1, x_2, …, x_n), and q is the level of environmental quality, which is a scalar fixed exogenously. The variable y is income, and p is the price vector of private goods p = (p, p_2, …, p_n). This yields a set of ordinary demand functions, x_j = x_j (p, q, y) for j=1 to n. Inserting the ordinary demand functions into the utility function provides an indirect utility function, v (p, q, y) ≡ v [x_j (p, q, y), q]. Suppose changes in environmental quality (q^0 to 〖 q〗^1) and utility u^0≡v (p,q^0,y) to 〖 u〗^1≡ v (p,〖 q〗^1,y). If this change is an improvement in environmental quality, 〖 u〗^1> u^0. If this change is an decrease in environmental quality, 〖 u〗^1< u^0. The compensation surplus and equivalent surplus (CS and ES) measures of changes in environmental quality are defined by (Hanemann 1991): v (p,〖 q〗^1,y-CS) = v (p, q^0, y) (B-2a) v (p,〖 q〗^1,y) = v (p, q^0, y + ES) (B-2b) In case of an improvement in environmental quality (CS > 0 and ES > 0), CS measures individual’s willingness to pay (WTP) to secure the gain by keeping the gainer... ... middle of paper ... ...landfill at each target site exceeds social costs. This implies that the City and County of Honolulu necessitates a new landfill despite efforts to enhance alternate methods such as source reduction, recycling, and waste to energy recovery. Thus, social costs minimization given restrictive or exclusionary criteria emphasizes economic efficiency. Equity can be incorporated in the process of landfill site selection. While benefits provided with a new landfill site are shared by all citizens, harms from a landfill (e.g., reduction in housing values) concentrate on a host community i.e., unequal distribution of wealth. In terms of the Kaldor-Hicks criterion, if winners (other communities except for a host community) from a policy that locates a new landfill can compensate losers (a host community), the policy will improve the status quo without finding a new landfill.
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