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This chapter examines welfare measures when they are made without cardinal utility functions to understand the properties of the aggregate dollar changes in utility computed in a conventional Harberger (1971) analysis. The Hatta (1977) decomposition is used to show how, for individual consumers, dollars are a reliable proxy for utility, whenever policy changes are incrementally small. This decomposition finds that income effects are a scaling coefficient on the efficiency effects from marginal policy changes that play no role in single consumer economies. A number of different approaches are examined to account for distributional effects when there are heterogenous consumers.

This chapter provides a set of questions drawn from material presented in previous chapters. Most are designed to emphasize important points, and to illustrate practical examples of applied welfare analysis. A number of questions are quite long and are intended as assignments, while others are more suitable for tutorial exercises.

Chapter 5 introduces the concept of value, and the methods used to obtain estimates of the value of scarce environmental goods and services—particularly the provision, cultural, and regulating ecosystem services. It discusses the concept of social opportunity cost, and shows how the concept informs our understanding of the trade-offs involved in application of the equimarginal principle. It clarifies the relation between the income and substitution effects of changes in value, compensating and equivalent variation, and the willingness to pay or willingness to accept. Valuation methods discussed include both revealed preference (travel cost, averting behavior, hedonic price, production function, replacement cost) and stated preference (contingent valuation, contingent behavior, choice modeling) approaches. The valuation of biodiversity is approached through the regulating ecosystem services, using a portfolio approach to the management of uncertainty. The chapter shows how managers may select which species to conserve so as to balance environmental risk and the benefits from ecosystems.

Rising global food prices and price volatility create an imperative to understand the impacts of food price shocks in low-income countries. In an era of growing trade integration, global prices are more likely to be transmitted to producers and consumers. This chapter presents a rural economy-wide model that nests micro models of subsistence and commercial households. It uses this model to explore the impact of global corn-price trends on the welfare of different household groups in rural Guatemala. A rural economy-wide compensating variation is used to measure welfare outcomes. Higher food prices benefit large-farm households. However, contrary to findings from aggregate general-equilibrium models, most rural household groups lose, as higher consumption costs more than offset the nominal income gains they get from higher food prices.