Introduction

At the heart of cost-benefit analysis (CBA) theory lie two basic principles (Pearce, 1986; Hanley and Spash, 1993): first that, as far as possible, all the costs and benefits arising from a project should be assessed; and, second, that they should be measured using the common unit of money. While these seem common-sense precepts, in application both principles raise highly complex problems. The issue of complete appraisal is, when taken to the extreme, ultimately insoluble in a world ruled by the laws of thermodynamics where, as noted by commentators such as Price (1987a, 2000) and Young (1992), everything affects everything else. For real-world decision-making, practical rules regarding the limits of appraisal are needed. Such rules are the stuff of numerous project appraisal guidelines, for example the Treasury's ‘Green Book’ (H.M. Treasury, 1991), whereas the research described here focuses on the second principle – of monetary valuation.

In discussing approaches to the monetary evaluation of environmental preferences we can first identify a wider global family of monetary assessment methods (see Figure 2.1). This comprises both the formal ‘valuation’ (or demand curve) methods discussed below and a quite separate group of ad hoc environmental ‘pricing’ techniques (see the review in Bateman, 1999). In theoretical terms valuation and pricing approaches are quite distinct. Whereas the former are based upon individuals' preferences and yield conventional, neoclassical, welfare measures (hence the term ‘valuation methods’), the pricing techniques are much more akin to market-price observations.