There are many examples of instances where a projects, policies or other investment initiatives give rise to social, health, or environmental impacts that cannot be readily valued through observed prices in the market place. These types of goods and services are typically not traded in markets, and hence there is no observable information about the amount people are willing to pay for improvements (or the amount of compensation people would demand for decrements).
Importantly, just because non-market goods and services are not priced in the market, it does not mean they can be disregarded when evaluating the societal value of a project, or comparing the relative merits of multiple projects. Putting these impacts to one side runs the risk of their contribution to community welfare being overlooked, and hence underinvesting resources in project that delivers these non-market goods and services.
Conversely, the absence of a valuation may give rise to projects being justified as being beneficial on the basis of subjective assessments of the size of environmental, social or health benefits from a narrow segment of the community– which may not reflect the preferences and values of the wider community.
For these reasons, decision-makers are increasingly looking to non-market valuation techniques as a means of quantifying community preferences and values. Synergies routinely use a number of these techniques in our project and policy assessments.
The suite of techniques can be grouped into two broad categories – revealed preference methods and stated preference methods.
Revealed preference methods use observations of actual behaviour or transactions to infer a value for the non-market good. These methods are generally applied after a project has been completed, as they require people to have experienced the improvement – or at least have knowledge of the amenity on offer.
Uses observations of property values as a proxy for measuring the amount people are willing to pay for environmental attributes, or high levels of visual amenity. For example, to estimate the value of a public park, the method establishes a statistical relationship between property prices and houses that lie in close proximity to a park. The price premium observed for these properties provides a measure of peoples’ willingness to pay for the amenity of a public park.
Uses the ‘price’ (or cost) that people pay to travel to a particular recreational site (or sites) to estimate the value they obtain from the non-market attributes at these sites. Surveys are used to collect data on the costs people incur, and these data are used to estimate a ‘trip generation function’ that relates travel costs to visit rates. A demand curve is then constructed using several assumptions, including that people would respond to the cost of travelling in the same way that they would respond to a site entry fee. All else being equal, improvements in the recreational experience at the site(s) should shift the demand curve such that willingness to incur costs to visit a site is increased. This is a measure of the recreational benefit.
This is a more sophisticated version of the travel cost method. It uses observations of people’s visitation choices to particular destinations from a wider set of possible locations. The method relates visitation frequency to each site to the cost incurred by an individual in travelling to the site, amenity characteristics at the site and other attributes. All else being equal, an increase in amenity or environmental quality at a particular site will increase a person’s ‘utility’ from visiting the site, which can be measured in monetary terms using the relationship between the quality level at a site and the travel costs incurred in visiting the site.
Stated preference methods involve surveying people to find out their stated willingness to pay for a specified improvement in non-market good. Stated preference surveys offer an advantage over revealed preference methods in that they are capable of assessing potential community benefits from environmental or social improvements prior to these impacts being delivered or projects commencing.
The two main methods are Contingent Valuation and Choice Modelling:
Is often used to estimate the highest amount that people would be willing to pay for improved environmental or social quality. The most for of Contingent Valuation is a referendum approach, in which people are presented with a set amount of money and ask whether or not they would be willing to pay that amount for improved outcome. The amount is varied across participants in a way that allows statistical models to be used to calculate average willingness to pay.
Is a more sophisticated variant of Contingent Valuation. Individuals are asked to choose their most preferred option from a set of alternatives, each of which consists of a bundle of attributes that characterise environmental or social improvements or other relevant changes. One of the attributes is the cost to the survey participant, and each choice set contains an option representing the status quo (no project scenario). By varying the levels of the attributes and presenting people with several choice sets, statistical methods can be used to quantify the trade-offs that people make between attributes.
Synergies has applied these techniques extensively across a wide range of project evaluations and policy contexts. For example, we have evaluated community values for:
