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Existence value: The theoretical case for and against its use in cost benefit analysis

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  1. Introduction
  2. An analysis of the existence value in cost-benefit
    1. The current debate
  3. Definitions and measurement of existence value
  4. Non-observability of preferences and measuring existence value
  5. Existence value and competing theories of ethical agency
  6. Technical problems with views compatible with psychological egoism
  7. Alternative explanations of existence value and their implications for cost-benefit analysis
  8. Conclusion
  9. Bibliography

The concept of existence value was first raised in one of the most influential papers in environmental economics by John Krutilla (1967), where he advocated a move away from the Pigouvian approach to conservation of natural resources in terms of the optimal inter-temporal utilization of natural resource stocks to an appreciation of several unique features of such resources. These included non-renewability, the possibility of option value, and existence, or non-use, value. Krutilla was advocating nothing less than pushing back the boundaries of the discipline: economists should consider more than just the valuation of common tangibles. The controversy that this assertion caused remains today, and divides most economists into two camps. Those such as Rosenthal and Nelson suggest that existence values are not to be treated merely as another type of good, as they represent something quite different, while those such as Kopp believe that what existence value is is not as important as the fact that we can envision it as consistent with neoclassical theory, and therefore are warranted in measuring it in a total valuation framework.

To assess the validity of these competing claims, the appropriate domain of discussion requires more than just the tools of economic analysis. As Portney (1994) writes: "?the critical scrutiny directed at the contingent valuation method has led some economists to think more deeply about cognitive processes, rationality, and the nature of preferences for all goods, public or private".

[...] For example, an agent's existence value for the Grand Canyon, while apparently coming from altruistic motives for the benefit of those who may visit it and enjoy its natural beauty, can be redescribed in terms of wanting to enjoy the satisfaction of knowing that the Grand Canyon is there to be enjoyed. Hence, all motivation can be redescribed in terms of psychologically egoistic motivation, so that the entire discussion is a red herring: wherever existence value comes from, if it is a value that comes from agents for goods, it is compatible with the neoclassical view. [...]

[...] In section three, the meta-ethical side issues of the importance of motive on the assessment of existence value, the validity of psychological egoism implicit in neoclassical economics are discussed and the case against considering existence value as a conventional pure public good is made. This paper is directed towards the informed economist, rather than the philosopher, and the mode of analysis shall be skewed accordingly. For brevity, a working knowledge of cost-benefit analysis, and in particular the Contingent Valuation Method (CVM) is assumed, as is a good knowledge of welfare economics, in particular Hicksian and Marshallian demands and Arrow's Impossibility Theorem. [...]

[...] Therefore, the essentiality of market goods at some level rules out the strongly separable form of utility function in Weakly separable preferences: pure existence value A more general case than the one above is provided by a utility function of the form: where and . Just as above, the marginal rates of substitution between all pairs of market goods are independent of so that E is not an argument in any Marshallian demand functions. The essentiality condition for a weakly separable utility function is: This time varies with p and m as well as this means that weak separability of preferences does not rule out the essentiality of market goods. [...]

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