The Effect of Environmental Constraints on Individual Economic Behavior

The Paretian measure of consumer surplus neglects the possibility that the state of individual welfare is conditioned by an economic parameter, as in the case of non-marketed environmental goods. As long as an environmental good serves as a constraint in the same way as price of an ordinary good, the equilibrium values such as price elasticity, input substitution and expenditure elasticity should vary with the quality of the environment. Therefore, spatially differentiated environmental quality yields suboptimal state of individual welfare economy, even though prices are invariant.