Use of option price as a welfare measure when conducting a benefit-cost analysis under uncertainty is appropriate only if the project under consideration will have no impact on the allocation of risk among individuals. Use of the willingness-to-pay locus as a benefit measure is appropriate only if the project will result in an efficient allocation of risk. A more general welfare measure is proposed, maximum agreeable payment, that correctly measures the benefits and costs of any project.
All Science Journal Classification (ASJC) codes
- Agricultural and Biological Sciences (miscellaneous)
- Economics and Econometrics