Related Goods Approaches - Indirect Substitute Approach

In many cases it is difficult to find a direct substitute, which enters into formal market, for the environmental action to be evaluated. In such cases we combine the production function approach with the direct substitute approach. First, we find a direct substitute of the environmental function. Second, we find out the value of this direct substitute through the production function approach discussed earlier.

Thus we find out the value of the environmental function indirectly through the production function approach. The indirect substitute approach is based on stringent assumptions about the substitutability between the two goods, the role of the substitute good as an input in the production of the output, and the value of the output.