Global Reference on the Environment, Energy, and Natural Resources

Edited by G. Adelson, R. Howarth, B. Hull, B. Minteer, B. Norton, and P. Thompson

Published by Gale / Cengage Learning
© 2009

Entry Title: NON-MARKET VALUATION

Ty Raterman
Department of Philosophy
University of the Pacific
3601 Pacific Ave.
Stockton, CA 95211
 Non-Market Valuation
Non-market valuation is the process of assigning monetary value to goods and services

that are not priced, or not accurately priced, through the operation of the market. This includes:

ecosystem health; wildlife habitat preservation; flood protection; scenic beauty; outdoor

recreational opportunities (e.g., wildlife viewing, fishing, swimming, skiing); clean air, water,

soil, and beaches; the existence of a species; and even human health and life.

Rationale for Non-Market Valuation

Non-market valuation facilitates public policy decisions by translating policy-related

gains and losses into a common unit. For example, once we monetize the benefits of the removal

of a certain amount of arsenic from drinking water, we can easily compare this to the cost of

arsenic-removal technology in order sensibly to determine whether an investment in such

technology is worthwhile. Otherwise, it is claimed, the decision that is made will inevitably lack

rational justification and will likely misallocate resources.

There are numerous reasons why the market fails to price goods, or prices them

inaccurately. Some goods are simply considered inappropriate to buy and sell. Human life, the

existence of a species of plant or animal, and various natural wonders within national parks, are

examples. Other goods – whether or not they are in principle inappropriate to buy and sell – are

not (properly) priced because they are not pure private goods. It is difficult, for example, to

prevent people from breathing air in, which means it is in turn difficult to demand that people

pay in order to do so; though people would be willing to pay something for air if they were so

required, and many would pay more for clean air than for dirty air. Because it is relatively non-

excludable, and also because it moves around, it is difficult to assign property rights to air, and
so difficult to commodify it. The result is that that the real value of clean air is not captured by

the price that we have to pay to breath it or to pollute it.

Methodology of Non-Market Valuation

The core idea underpinning non-market valuation is that a good’s worth is tied to

people’s preferences in respect to it. One’s preferences in respect to a good are expressed by –

perhaps even consist in – what one would trade for that entity; and money is obviously a

convenient unit of trade. So, non-market valuation involves capturing how much money people

are willing to pay in order to get or retain a good. However, because what is being valued is

sometimes bad (e.g., environmental hazards that impose health risks), and because people will

sometimes balk at the idea of paying for something they perceive themselves as having a right to

(such as clean air), economists will sometimes alternatively try to discern the amount people

would be willing to accept in order willingly to get that bad thing or lose the good.

There are two general methods for discerning willingness to pay/accept: the revealed-

preference and the stated-preference methods. The revealed-preference method looks at an

individual’s actual consumer behavior vis-à-vis marketed goods that are related in important

ways to the non-market goods we are trying to price. For example, economists might infer

willingness to pay for clean air by comparing housing prices in neighborhoods with relatively

clean air to housing prices in neighborhoods with dirtier air (trying to hold all other variables

constant). Or, to price recreational opportunities associated with a particular beach or park,

economists might look at how much people pay in order to travel there. To price human health,

economists might examine wages in order to see how much more people need to be paid in order
to work a job that subjects them to greater health risks rather (but that in other important respects

– e.g., physical difficulty, educational prerequisites – is similar to a safer job).

Sometimes, however, there is no market behavior from which inferences can be drawn.

(Consider, for example, trying to monetize the value of a second hull on oil tankers, which would

reduce the likelihood of oil spills.) In such cases, a second general method for valuing non-

market goods – the stated-preference method, which is sometimes called contingent valuation –

can be used. Here carefully-worded surveys ask people how much the good in question is worth

to them.

Critiques of Non-Market Valuation

There are several problems plaguing the revealed-preference method. When looking at an

individual’s behavior in respect to that relevantly similar good, the analyst can typically see only

that a person is, or is not, willing to pay a certain amount, but cannot thereby infer precisely how

much that person would have been willing to pay. For example, the mere fact that one does not

pay to travel to a park does not tell us whether there is some lesser amount that one would have

paid to make the trip. Relatedly, the fact that one does pay to travel to the park does not tell us

whether one would actually have paid considerably more to get to the park (which is to say that

the revealed-preference method does not capture consumer surplus).

The stated-preference method, too, is not without problems. Economists have tested

whether people’s stated willingness to pay is in fact an amount that they would truly be willing

to pay; and it turns out at least sometimes not to be. For example, one might be asked about

one’s willingness to pay in order for the amount of arsenic in one’s drinking water to be reduced

down to 10 parts-per-billion. Once a dollar amount is indicated, the economist might then report
that a filter that will make precisely that reduction is actually available for that dollar amount.

Inevitably – and problematically, from the perspective of the advocate of non-market valuation –

some of the respondents will then pass on the opportunity to buy that filter. Relatedly, people do

not deal well with open-ended willingness to pay questions. Consider, for example, being asked:

How much would you be willing to pay save the polar bear species? People have no point of

reference, and so their answer is fairly arbitrary. It is now recognized that it is better for the

economist to ask a series of closed-ended questions, such as: Would you be willing to pay $X to

save polar bears? (where X is then adjusted up or down as need be). However, there is danger of

an anchoring effect, whereby the amount that the economist starts with – whatever it is! – tends

to strike people as more or less the right amount.

Other problems associated with non-market valuation cut across valuational methods, and

are more philosophical in nature. One is that non-market valuation seems to be naively

subjectivist. While the intuitive view is that we are at least occasionally wrong about a thing’s

value, the theory underpinning non-market valuation seems to deny this. It is not clear how the

advocate of non-market valuation could acknowledge that we frequently pay for things that are

in some meaningful respect worthless! At the very least, we risk misvaluing something when we

value it without accurate information; though, alas, economists typically do not insist that a

person be particularly well informed before her or his willingness to pay is captured. Even where

people have full information, though, their preferences are often disconcertingly strange. For

example, in one study participants were asked to specify the number of lives a medical research

institute would need to save in order to deserve receiving a $10 million grant. Startlingly, when

15,000 people were said to be at risk, the median number indicated was 9,000, whereas when

250,000 people were at risk the median number specified was 100,000.
 An additional problem concerns whose preferences count. Consider, for example, a case

where the Brazilian government is trying to value the rainforests within its borders in order to

facilitate a policy decision. As it turns out, people all over the world have preferences regarding

the preservation of these rainforests. So, are all these preferences relevant, or only those of

Brazilians? Including only Brazilians’ preferences seems to undervalue the rainforests. However,

doing otherwise is perhaps tantamount to giving people all over the world an undue vote on a

matter of Brazilian governance; and may simply be logistically impracticable as well. In

addition, non-market evaluation ignores animals’ preferences, though animals use and benefit

enormously from a wide array of environmental goods. Some see such anthropocentrism as

objectionable.

BIBLIOGRAPHY

Bockstael, Nancy E., and Kenneth E. McConnell. 2007. Environmental and Resource Valuation

with Revealed Preferences. Dordrecht: Springer.

Canninen, Barbara J. (ed.). 2006. Valuing Environmental Amenities Using Stated Choice Studies.

Dordrecht: Springer.

Champ, Patricia A., Kevin J. Boyle, and Thomas C. Brown. A Primer on Non-Market Valuation.

Dordrecht: Kluwer Academic Publishers.

Freeman III, A. Myrick. 2003. The Measurement of Environmental and Resource Values

(Second Edition). Washington, D.C.: Resources for the Future Press.

Pearce, David. 1993. Economic Values and the Natural World. Cambridge: MIT Press.