Tuesday, March 30, 2010

Environmental Valuation and General Equilibrium

I'm not a fan of most approaches to non-market environmental valuation and one of my criticisms is that once all externalities would be internalized all market prices would change including in turn the valuations placed on the current non-market goods. Existing valuations of non-market environmental goods are partial equilibrium estimates which could be very misleading. I haven't always expressed that point very clearly. This point was the main point of Ayres and Kneese's original discussion of externalities and is also implicit in Ayres' comment on Costanza et al.'s 1997 paper in Nature.

Now Jared Carbone and V. Kerry Smith not only express the point very clearly in a new working paper but they also calibrate a CGE model to illustrate what happens to valuations in general equilibrium. They find quite large general equilibrium effects. This is definitely a step in the right direction.

1 comment:

  1. Thanks for the heads-up - I liked their paper on second order effects a few years ago quite a lot.