1. Valuing environment as production input

2. Production function The Cobb-Douglas function: q: output x: variable input E: environmental quality

3. Environment improvement

4. Input demand function The input demand function gives the profit maximizing level of x Profit function Inverse input demand function

5. Change in profit At environment quality E 0 the profit will be: If environment quality improve from E 0 to E 1, the production function shift, then output at x 0 rises to q 1/x0 Profit rise to

6. The change in profit (without adjustment in input) equals the increase in revenue. However, the improvement in Environment quality also make the inverse input demand function shift. The profit maximization now occurs at x 1. The maximize profit is given by:

7. The change in profit with input adjustment: The change in profit is now not just a change in revenue, it also includes the changes in expenditure on the variable input.