Theories of Failure, Failure of Theories and Non-Market Valuation of Environment: A Survey

Non-market valuation of environmental benefits and costs plays a crucial role in environmental decision-making both at the micro and at the macro-levels. The economic valuation of environmental services, though confronted with several issues, assumes paramount importance especially in developing countries where ‘scarcity’ of environmental resources due to degradation and scarcity of financial resources to arrest it, affect the welfare of a large number of resource dependent households. Although economic valuation can guide decision-making regarding environmental resource allocation in developing countries, lack of appropriate theoretical framework used in valuation studies - especially in an interdisciplinary context - do generate ‘unreliable’ and ‘invalid’ results that could possibly lead to distorted policy outcomes. This being the case, the present paper basically reviews three types of theoretical developments embedded in economics, which can provide appropriate frameworks to value changes in economic welfare due to changes in environmental resource base. The review suggests that the non-market valuation should be treated as ‘derived demand’ from any of these theoretical frameworks in order to initiate appropriate environmental policy measures in the relevant areas.