Valuing Reduced Morbidity: A Household Production Approach

Abstract

Individuals frequently apply a household technology to combine public and private goods in the production of nonmarket commodities for final consumption. Hori [9] demonstrates that in these situations, market prices of private goods together with production function parameters may encode enough information to value both public goods used as inputs and nonmarket final consumption commodities. Although this valuation methodology is objective and market based, it seldom has been applied for three reasons. First, underlying technical relations either are unknown or data needed to estimate them are unavailable. Second, even if relevant technical information is at hand, the consumer's budget surface in commodity space may not be differentiable when joint production and other complicating factors are present. As a consequence, the commodity bundle chosen is consistent with an infinite number of marginal rates of substitution and values of public goods and nonmarket commodities remain unknown. Third, joint production and nonconstant returns to scale also pose serious difficulties when taking the closely related valuation approach of estimating the area behind demand curves for private good inputs and final consumption commodities [2]. This paper presents a unique application of the household production approach to valuing public goods and nonmarket commodities which allows for certain types of joint production and addresses key problems identified by previous authors. Technical relationships are estimated between health attributes, private goods, and air quality. Data used in the analysis are drawn from a special survey designed to implement the household production approach. Econometric estimates allow for censored dependent variables and cross-equation error correlations in panel data using tobit models with individual-specific variance components. Key results are: (1) attempts