Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets

By Harry F. Campbell; Richard P. C. Brown | Go to book overview

12
Valuation of Non-marketed Goods

Introduction

This Chapter deals with the methods and techniques used by economists to place monetary values on non-marketed goods and services, or, more specifically, those project inputs or outputs which affect the level of economic (material) welfare but which do not have market prices. While the discussion will focus mainly on environmental goods in order to illustrate the issues involved, the Chapter concludes with a brief discussion of various methods of valuing human life.

In previous Chapters we discussed how benefit-cost analysis involves the identification and valuation of a project's costs and benefits. Our analysis has so far been confined to those inputs and outputs that are exchanged through markets and where, in consequence, market prices exist. We recognized in Chapter 5 that the market does not always provide the appropriate measure of value and that shadow-prices sometimes have to be generated in order to better reflect project benefits or opportunity costs. This discussion was essentially about adjusting existing market prices where these were believed to be distorted, due perhaps to government intervention or to imperfections in the structure and functioning of markets. The present Chapter deals with another type of market failure – where there is no market for the input or output in question, and, therefore, no market price at which to value the cost or benefit.

As a starting point it is reasonable to ask why there is no private market for the commodity in question. Markets exist in order to trade ownership of goods and services – hamburgers and machine tools, haircuts and labour services. For economic agents to exchange ownership of a good or service there must exist a reasonably well-defined set of property rights that specify what is being traded. In particular, the good or service must be excludable, meaning that it is feasible for the owner to prevent others from enjoying the good or service unless they pay for it. If a commodity is not excludable a private agent would be unlikely to be able to recover the cost of supplying it by charging a price for it – even if some customers purchased the good others could act as free riders, enjoying the good without paying for it. Of course excludability is partly a matter of cost – while free-to-air TV is non-excludable, excludability can be achieved by installing a cable system. However if access to a good or service is not excludable at a reasonable cost it will not be traded in private markets. Examples of nonexcludable goods are national parks, national defence, and some forms of fire and police protection.

Air and water pollution are further examples of non-excludable goods, which could more accurately be described as [bads], since they detract from rather than contribute to

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