Application of the distance function to nonmarket valuation of environmental goods and services: An illustrative example

This paper develops and implements a unique formulation of a household production model in that technology is characterized as a distance function. The properties of the distance function allow for the derivation of shadow prices for the inputs and outputs associated with household production, which can be applied to the problem of valuing nonmarket goods or activities. The approach requires only one input to or output of household production to bear a price. The derivation of shadow prices for all other household inputs/outputs follows from the properties of the distance function. I demonstrate the approach using data on the waste management activities of a sample of households from Marietta, Georgia, and by calculating shadow prices for the nonmarket activity of recycling.