THE CHOICE OF A WELFARE MEASURE UNDER UNCERTAINTY

Use of option price as a welfare measure when conducting a benefit-cos t analysis under uncertainty is appropriate only if the project under consideration will have no impact on the allocation of risk among indi viduals. Use of the willingness-to-pay locus as a benefit measure is a ppropriate 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 projec t.