Reformulating the foundations of consumer choice theory and environmental valuation

The burgeoning field of environmental valuation has raised serious doubts a bout the fundamental axioms of consumer choice theory, the general validity of the Walrasian system and methodological individualism. This paper exami nes these aspects of consumer choice theory, paying particular attention to the pioneering contributions of Georgescu-Roegen. We argue that evidence f rom psychology, game theory, anthropology and contingent valuation surveys reveals a more complex pattern of decision-making than that described by ne oclassical utility theory. We discuss the notions of the invariance of pref erences, non-satiation, the principle of complementarity, lexicographic pre ferences and the hierarchy of wants with reference to environmental valuati on. We also discuss the notion of marginal utility of money, the validity o f the Walrasian system, and methodological individualism using scaling conc ept in hierarchy theory. We then address the conflict between theory and re ality by introducing a probabilistic binary choice scheme under uncertainty about environmental attributes. We argue that these extensions are necessa ry to account for consumer choices revealed in environmental valuation surv eys. We conclude with the hope that a reformulation of consumer choice theo ry based on realistic models of human behavior can be the basis for a viabl e alternative to neoclassical welfare economics. (C) 2001 Elsevier Science B.V. All rights reserved.