WELFARE ANALYSIS WHEN BUDGET CONSTRAINTS ARE NONLINEAR - THE CASE OF FLOOD HAZARD REDUCTION

Nonlinear budget constraints occur when goods have a ''quality'' dimen sion or possess ''characteristics'' and the price of the composite goo d is a nonlinear function of its characteristics. Homogeneity is gener ally not characteristic of indirect utility functions and demand funct ions when budget constraints are nonlinear. In this situation, willing ness to pay methods that impose homogeneity (or fail to impose restric tions implied by nonlinear budget constraints) on demands are inapprop riate. A straightforward method of estimating willingness to pay when budget constraints are nonlinear implements a direct utility approach. Exact and biased welfare measures are obtained without integration. ( C) 1994 Academic Press, Inc.