2.5.3. Nonmarket Impacts
Many impacts involve changes in the direct and/or indirect flows of valued
services to society. These services can offer a wide range of valuable attributes,
but they frequently go unpriced in the economic sense. Markets simply do not
exist for some attributes and some services; contemplating markets for some
others (e.g., health services) has been questioned even given extensive competiton
for services and products. For others, markets that do exist fall short of being
comprehensive or complete in the presence of externalities of production or
consumption. In either case (and others), researchers have recognized the need
to develop alternative means with which to assess value. More precisely, they
have tried to extend the scope of the economic paradigm so that implicit and
explicit tradeoffs between development and conservation of unpriced resources
can be explored within the structures of standard decision analytic tools such
as cost-benefit analysis, cost-effectiveness analysis, and so on. Parikh and
Parikh (1997, 1998) provide a primer on valuation with case studies.
To be more specific, economists have built a theory of choice on the basis
of the notions of consumer sovereignty and rationality. Economists assume, therefore,
that individuals are able to value changes in nonmarket goods and services as
easily as they can value changes in marketed goods and services. The only difference
between the two cases is that markets provide the researcher with some indirect
data with which to assess individuals' values of marketed products. Nevertheless,
individuals should be able to tell researchers what they would be willing to
pay for changes in nonmarket conditions or willing to accept as compensation
for those changes. In fact, willingness to accept (WTA) payment for foregoing
a good and willingness to pay (WTP) for a good are the two general yardsticks
against which values are judged.
It should be noted that WTA and WTP are seldom the same for most nonmarket
goods or services. In fact, WTA and WTP can give wildly different estimates
of the value of these services if there are no perfect substitutes (i.e., if
it is impossible to fully compensate individuals unit by unit for their loss).
When such a substitute does not exist, WTA > WTP. By how much? Cummings et
al. (1986) report that it is not uncommon for estimated WTA to be more than
10 times larger than estimated WTP. These differences might be derivative of
the method of estimation, but they also reflect the fact that WTA and WTP are
two different concepts that need not match.
It also should be noted that WTA and WTP have analogs in the market context.
Compensated variation (CV) is the extra income that individuals would require
to accept an increase in the price of some marketed good; CV is the analog of
WTA. Equivalent variation (EV) is the income that individuals would be willing
to forego to see the price of some marketed good fall; EV is the analog of WTP.
These measures sometimes are used in market-based analysis. It should be no
surprise that EV < CV unless the good in question has a perfect substitute.
184.108.40.206. Direct Methods of Valuation
Valuation methods usually are divided into two distinct approaches. Direct
methods try to judge individuals' value for nonmarketed goods by asking
them directly. Contingent valuation methods (CVMs), for example, ask people
for their maximum WTP to effect a positive change in their environments or their
minimum WTA to endure a negative change. Davis (1963) authored the first paper
to report CVM results for environmental goods. Comprehensive accounts of these
methods appear in Mitchell and Carson (1989), Hanley and Spash (1993), and Bateman
and Willis (1995). This is a controversial method, and current environmental
and resource literature continues to contain paper after paper confronting or
uncovering problems of consistency, bias, truth-revelation, embedding, and the
like. Hanley et al. (1997) offer a quick overview of these discussions
and a thorough bibliography.
220.127.116.11. Indirect Methods of Valuation
Indirect methods of valuation try to judge individuals' value for nonmarketed
goods by observing their behavior in related markets. Hedonic pricing methods,
for example, assume that a person buys goods for their various attributes. Thus,
for example, a house has attributes such as floor area; number of bathrooms;
the view it provides; access to schools, hospitals, entertainment, and jobs;
and air quality . By estimating the demand for houses with different sets of
attributes, we can estimate how much people value air quality. One can thus
estimate "pseudo-demand curves" for nonmarketed goods such as air
quality. Travel costs are another area in which valuation estimates of the multiple
criteria on which utility depends can be finessed out of observable behavior.
The hedonic method was first proposed by Lancaster (1966) and Rosen (1974).
Tiwari and Parikh (1997) have estimated such a hedonic demand function for housing
in Bombay. Mendelsohn et al. (2000) brought the hedonic approach to the fore
in the global change impacts arena. Braden and Kolstad (1991) and Hanley and
Spash (1993) offer thorough reviews of both approaches. Is there a scientific
consensus on the state of the science for these methods? Not really. There is,
instead, a growing literature that warns of caveats in their application and
interpretation (e.g., health services) and/or improves their ability to cope
with these caveats. Smith (2000) provides a careful overview of this literature
and an assessment of progress over the past 25 years.