Uncertainty, benefit-cost analysis, and the treatment of option value

Abstract

This paper proposes a new conceptual framework for defining welfare measures under uncertainty: the planned expenditure function. This function describes the locus of expenditures on contingent claims that are required to realize a given level of expected utility. To illustrate the convenience of the framework, it is used to consider the definition of the option price, the appropriate treatment of option value, the valuation of risk changes, and the definition of non-use benefits under uncertainty.