Supply-Side Option Price and Its Measurement

The range of food, environmental, and agricultural policy problems includes many important issues where uncertainty plays central role. In this paper we investigate a theoretical framework for evaluating welfare changes in a world with uncertainty. Briefly reviewing the development of option value and option price to give the reader a feeling for the evolution of thinking that has occurred, we investigate two theoretical properties of the supply-side option value and price, which are exact welfare measures under supply uncertainty. One property is the sign-preserving property of supplyside option price to the change of expected utility. The other property is the determinant property of the sign of supply-side option value. In the course of showing the second property we can deal without very restrictive and unreasonable assumptions. Its measurement are also explained, focusing on the use of the hedonic technique. The paper concludes with a discussion of promising applications in natural resource economics and food and agricultural policy analysis