American Economic Association

The Valuation of Social Cost. by David W. Pearce

Review by: Frances Stewart
Journal of Economic Literature, Vol. 17, No. 4 (Dec., 1979), pp. 1448-1449
Published by: American Economic Association
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1448 Journalof EconomicLiterature,Vol. XVII (December1979)
and the emerging literature on (incentives-
compatible) demand revelation processes and
public goods.
On broader grounds,one can naturallyraise
a host of questions regarding the relevance of
this research to existing choice processes.
While one should not faultthe present author
for not addressing these difficultissues, one
nonetheless awaits with some impatience the
results of linking this fine body of thoretical
thought to the growing empirical and experi-
mental literatureon organizational and politi-
cal choice processes.
PAUL R. KLEINDORFER
InternationalInstituteof Managementand
The Universityof Pennsylvania
The valuationof social cost.Edited by DAVID
W. PEARCE. London; Boston and Sydney:Al-
len & Unwin, 1978. Pp. 197. $26.50, cloth;
$11.50, paper. JEL 79-0330
This book is a collectionof essays on the valu-
ation of social cost. Aftertwo general chapters,
authors summarize the state of the art with
respect to particularareas-noise nuisance and
air pollution (Pearce), recreational land use
(R. K. Turner), human life (G. Mooney), and
social relevance (J.Stanley and A. Rattray).Fi-
nally, R. Lecomber considers the various at-
tempts that have been made to adapt national
accounts to take account of social costs. To-
gether the essays provide a clear and concise
account of where we stand with respect to
evaluating social cost. All in all it seems that
we have not got very far: it is worth consid-
ering why this is so.
The question of evaluating social costs raises
difficultissues at a number of levels of analysis.
Two questions have logical priority.First,the
question of whymeasure social cost; secondly,
thatofthe meaning ofsocial cost-in particular
the question of values,or whose weights are
to be adopted in defining"social" costs. The
introductorychapter provides a good answer
to the firstquestion: a systemthat neglects so-
cial costs and benefitswill persistentlyoverin-
vest in thingsthat produce goods and services
that are valued by the market and will make
excessive use of non-marketedcosts-such as
pollutants, etc. As technology develops, non-
market effectsappear to be increasing in im-
portance, thus increasing the significance of
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evaluating social costs. But the second question
is much more difficultto answer-the chapter
by C. A. Nash considers it explicitlyand finds
no satisfactoryanswer. Social costsand benefits
are differently valued according to whose val-
ues are adopted, and therefore the weights
adopted by evaluators; differencesin values
may arise from differencesin income levels,
in tastes, and in interests.Thus, for example,
a poor rural farm laborer may evaluate the
disbenefitsof nitratepollutiondifferently from
a rich urban consumer.
In principle there is no correct answer to
the question of values and weights,and conse-
quently no uniquely correct concept of social
costs. This problem underlies all the particular
studies. While this is true of social costs, it is
ofcourse also true of marketcosts and benefits:
the market adopts the weights given by in-
comes and purchasing power. Many social cost
evaluations try to use the same weights (e.g.,
valuing noise nuisance by change in house val-
ues; lifeby the present value ofhuman capital).
If the idea of the exercise is to extend the prin-
ciple of the market to the unevaluated exter-
nalities,then it would seem logical to use simi-
lar weighting principles. But this means that
the same noise nuisance may be considered
much less significant, in termsofcostsimposed,
if it affects10,000 poor squatters in Calcutta
who have no houses and thereforesufferno
loss in house value, than ifit affectsone aristo-
crat, the value of whose estate may be halved.
Similarly,on the human capital approach to
the evaluation of human life the value of the
lives of the unemployed (possibly those very
same squatters) especially if they fall into the
unemployable category may be zero (or even
on some assumptions negative), whereas the
value of the lives of the employed are positive
and vary positively with their income level.
While logic may favor this approach, there
does seem somethingvery odd about claiming
that it represents any sortof social evaluation,
withthe implicitconnotationofsocial responsi-
bilityfor the poor, the unhoused, and the un-
employed. Yet if, in response to this type of
argument, some other principle of evaluation
is adopted, not only is there the difficultques-
tion of how to justifythe particular principle
adopted, but also an inconsistencyarises be-
tween marketand social cost evaluation,which
 Book Reviews
may lead to new problems of resource alloca-
tion: in social-cost evaluation the views, e.g.,
of the poor, will be given farmore weight than
in the marketevaluation ofresource allocation.
This inconsistencydoes no more than reflect
an existinginconsistencybetween the way in
which many democratic societies make politi-
cal decisions (roughlyone man one vote) and
the way they make economic decisions (one
dollar one vote).
There is littlediscussionof thisfundamental
problem in the chapters on particular topics,
despite the factthata solutionto it is necessary
to guide the evaluation. With some exceptions,
most methods adopt a consumer sovereignty/
market value approach. Assuming the funda-
mental value question has been settled, there
remain three furtherissues: one is identifica-
tion of the sort of factual questions that need
to be answered to provide an input into social
evaluation. The measurement of social cost is
a relatively new area; it is apparent that in
some areas we are stillonly beginning to iden-
tifywhat we need to know, or how to pose
the questions-this is most apparent in the
chapter on social severance (dislocation costs,
pecuniary and psychological)which in the end
more-or-lessgives up and argues that econom-
ics can only deal withpart of the costs of sever-
ing human ties; secondly, having established
the questions the next step (which it turnsout
was in some cases taken firstthrougha familiar
quirk of research sequences) is to findthe an-
swers. Here it turns out that there are enor-
mous areas of ignorance. On every subject
there is a dearth of scientific,social, and eco-
nomic information.Thirdly, when the facts
have been produced, it is necessary to turn
them into values (in some cases the method
adopted does this automatically-e.g., with
house values-but in more cases the facts are
in terms of specific consequences such as ill-
nesses caused, or toothdecay, deoxygenization,
etc, etc.)
It is clear that we are very far fromhaving
definitive answers to these questions in any
of the areas covered. The book thus provides
an agenda forresearch ratherthan a summary
of the answers.It provides a good startingpoint
foranyone interestedin a quick review of the
work that has been done, as well as a pointer
to new research needs. The large area of igno-
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1449
rance in thisfielddoes notjustifydoing nothing
about externalities. It underlines the essen-
tially arbitrarynature of much measurement;
and it helps justifywhat mightotherwise seem
the rather clumsy instrumentsthat govern-
ments use-of bans and regulations, rather
than discriminatingsensitive taxes,incentives,
and social cost benefit analysis.
FRANCES STEWART
Instituteof Commonwealth
Studies
University of Oxford
Economictheoryand thecore.By LESTER G.
TELSER. Chicago: University of Chicago
Press, 1978. Pp. xix, 407. $36.00.
JEL 79-0334
It is not often that importantnew work in
economic theory appears firstin book form.
The proliferationof specialty journals, which
encourages quick publication of concise re-
ports,militates against comprehensive discus-
sions of interrelated problems. Lester Telser's
EconomicTheoryand theCoreis thusdoubly
unusual, being a book and a work of origin-
ality.
Telser's earlier, Competition,Collusion and
Game Theory[1, 1972] broached a number of
issues that are fullyexplored in this 1978 vol-
ume. Specifically,Telser had recognized the
fact that the core of an n-persongame,has at-
tributes that transcended its usual treatment
as an alternative characterization of the com-
petitive equilibrium in many-tradergeneral
equilibrium models. Telser had, for example,
used the core to rehabilitatethe Bohm-Bawerk
"marginal-pairs"approach to the construction
of supply and demand curves in a partial equi-
librium setting.
Justas general equilibrium theoristsby the
late 1960's were exploitingthe core as an eco-
nomic concept to rewrite the theory of ex-
change, Telser was tryingto construct "small
numbers of traders" models to define the role
of contractual freedom in the determination
of market outcomes. It is this program, initi-
ated in the 1972 book, which attainsa fullness
in the book under review.
The basic idea of the core is easy to state.
Consider a market with m traders with initial
holdings of n commodities. The traders have
smooth preferences over the various possible
bundles (n-vectorsin R+n).They wish to make