environmental impacts determined under the first step are valued at the market price in terms of the corresponding change in the output<sup>9</sup> . _Dose-response function_ and _change-in-productivity_ methods are variants of the production function and share the same methodology.

# _Assumptions and Limitations_

The main shortcoming of this method is that interrelated causes and multiples impacts make it difficult to value comprehensively the environmental impacts. The role of the environment is multiple and a single ecosystem can support various economic activities. Identifying the complex interrelationship between the environmental quality deterioration and the marketed goods and services is crucial and often subject to bias. Another shortcoming of this method is that it ignores costly actions undertaken by individuals to prevent or mitigate environmental damages. Defensive or mitigating expenditures methods assess this feature and account for averting behavior. Finally, this approach does not consider the non-use value, i.e the existence value or the visual aesthetic of a natural site. Therefore, the production function approach provides a lower bound estimate of the foregone opportunity cost.

# _Variants_

_Human capital cost methods_ as well as _damage and abatement costs methods_ are all variants of the production methods to the extent that intangible goods (or bads) are measured at the market value of the resulting economic losses using a “dose-response function”, “exposure-response function” or “production function”. When the production function is applied to the health context, the _human capital cost_ method consists in quantifying human capital loss by assessing assesses the value of mortality by assigning a monetary value to the loss in productivity and foregone lifetime income. This approach has been used for instance to calculate monetary compensation for an individual death to its heir. The main shortcoming is that individual values are purely measured in terms of their economic contribution, i.e. priced on the labor market. Valuing environmental effects on mortality for unemployed, children, elderly or individuals working in the informal sector is more critical as there is no wage rate.

The _abatement costs_ are the costs of the most expensive technology used to meet government targets. The costs are determined by the intersection between the marginal costs for each firms and the ceiling set by the public authorities. When the targets are aligned with the social optimum, the abatement costs amounts to the Pigovian tax where the externalities are internalized. The _damage costs_ encompass the physical costs caused by the deterioration in environmental quality. It is commonly assessed using the impact pathway approach, which tracks the release of pollutant and estimate the physical impacts using a _dispersion-dose-response_ function. The physical impacts, which include effects on human health, ecosystems services, agricultural output and physical capital, are then monetized at the market prices.

DeBruyn and others (2005) estimated two sets of shadow prices for the Netherlands in the period of 2008-09. The first set displays the _abatement costs,_ illustrating the supply function for environmental

> 9 In the impact pathway analysis literature, environmental impacts can be evaluated at the midpoint level, i.e. at the environmental theme encompassing climate change, acidification, euthrophication and at the endpoint level, i.e. the impact on human health and economic activity.

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