In the previous chapter we investigated the effect of chronic diseases on satisfaction with life as a whole. We were then able to estimate trade-off ratios between those diseases and income, or, in other words, the shadow prices of various diseases.
It is rather obvious that, at least in theory, the same approach can be used for the assessment of the impact of many other exogenous variables as well. In the next two chapters we consider two examples. In this chapter we look at the effect of climate on welfare and well-being. This chapter sets the stage for a general method for the assessment of external effects. For non-economists this concept needs some explanation. An individual's situation may be described by two types of variables, say y and x, and, accordingly, the individual's well-being is evaluated by an evaluation function. The first variables are variables which the individual may change by purchasing goods and services, choosing another job, and so on. The second class consists of variables that cannot be influenced by the individual but affect his or her well-being. The climate is an obvious example. In fact, it would be preferable to speak of external factors instead of external effects. However, the subject was first studied within the framework of industries that pollute their environment and hence damage the living environment of others. Here we can indicate an agent that generates an external effect from which others are suffering. The question is then how the disadvantage for the passive party should be evaluated and whether he or she can be compensated for the damage. In the present framework we use the word in a wider context, where no specific generator can be identified and where the external effect cannot be stopped.
When one is looking for climate effects it stands to reason that one must have observations from regions with different climates. It follows that we can only use data sets which refer to large countries or which cover a sufficient variety of small countries. There are not many data sets which allow for those possibilities. A second conceptual problem is that the definition of climate is not as simple as one might expect.