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Valuing non-market impacts annex

Value, utility, Welfare

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and

Well-Being

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SocialCostBenefitAnalysisseekstoassessthenetvalueofapolicyorprojecttosocietyasawhole.Thevaluation ofnon-marketimpactsisachallengingbutessentialelementofthis,andshouldbeattemptedwhereverfeasible.Thefullvalue of goods such as health, educational success, family and community stability, and environmental assets cannot simply be inferredfrommarketprices,butweshouldnotneglectsuchimportantsocialimpactsinpolicymaking.ThisAnnexoutlines techniques for valuing non-market impacts, and some typical applications such as time-savings, health benefits, prevented fatality, design quality, and the environment. These approaches can be complex but are equally as important as market impacts.

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Economistsattempttoattachamonetaryvaluetonon-marketgoodsbylookingattheimpactthatthesethings haveonutility.Utility,inthebroadestsense,referstothesatisfactionthatapersongetsfromconsumptionofagood,or tothechangeintheirwelfareorwell-being.Becauseitisdifficulttoobserveutilitydirectly,ithastraditionallybeeninferred by observing the choices that people make within related or hypothetical markets. More recently, economists have attemptedtomeasuredirectlytheimpactofnon-marketgoodsonlifesatisfaction.

Market based approaches - Stated Preference and Revealed Preference

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The preferred method of estimating this change in utility is to simulate the market in order to estimate people's `willingnesstopay'(WTP)or`willingnesstoaccept'(WTA)aproject'soutputsoroutcomes.Willingnesstopayisthemaximum amountofmoneyanindividualiswillingtogiveupinordertoreceiveagood.WTAistheminimumamountofmoneythey wouldneedtobecompensatedtoforegoorgiveupagood.Theamountconsumersarewillingtopaydependstoalarge extentonthelevelsofincomeavailabletothem,sovaluationsareusuallyobtainedbyaveragingacrossincomegroups.

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Themarketbasedapproachesconsistof`RevealedPreference'approachesand`StatedPreference'approaches.1

Revealedpreferencetechniquesinvolveinferringtheimplicitpriceplacedonagoodbyconsumersbyexamining theirbehaviourinasimilarorrelatedmarket.Hedonicpricingisanexampleofthisapproach.Forexample,therelationship betweenhousepricesandlevelsofenvironmentalamenity,suchaspeaceandquiet,maybeanalysedinordertoassigna monetaryvaluetotheenvironmentalbenefit.Anotherexampleisthetravelcostmethod,whichinvolvesestimatingthe costspeopleincurinordertoconsumeanon-marketgoodsuchasarecreationalsite.

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Statedpreferencetechniquesusespeciallyconstructedquestionnaireswhichdescribeahypotheticalchoicewithin ahypotheticalmarketinordertoelicitestimatesofthewillingnesstopay(WTP)for,orwillingnesstoaccept(WTA),a particularoutcome.Whenusingstatedpreferencesthemainchoiceisbetweencontingentvaluationandchoicemodelling (CM).ContingentvaluationstudieselicitWTPorWTAviadirectquestionssuchas`Whatisthemaximumamountyou wouldbepreparedtopayeveryyeartoreceivegoodx?'(the`open-ended'format)or`Whichoftheamountslistedbelow bestdescribesyourmaximumwillingnesstopayeveryyeartoreceivegoodx?'(the`paymentcard'format).CMstudies, on the other hand, elicit values by presenting respondents with a series of alternatives and then asking which is most preferred.Theyareoftenusedinordertovaluespecificattributesofagood,ratherthanthegoodasawhole.

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Thetechniquechosenwilldependontheindividualcircumstances,andshouldbejudgedonacase-by-casebasis. Asageneralrule,revealedpreferencemethodsarefairlyreliable,andshouldbeusedwheretherelevantinformationcan

1 MoredetailonthepracticalapplicationofbothstatedpreferenceandrevealedpreferencesapproachescanbefoundintheGreenBookdiscussionpaper,Fujiwara andCampbell(2011),`ValuationTechniquesforCostBenefitAnalysis:StatedPreference,RevealedPreferenceandSubjectiveWell-BeingApproaches',availableonthe HMT website: http://www.hm-treasury.gov.uk/d/green_book_valuationtechniques_250711.pdf. There is also more guidance on Stated Preference techniques specificallyfromtheoldDTLR,DavidPearceandEceÖzdemirogluetal.(2002),`EconomicValuationwithStatedPreferenceTechniques:SummaryGuide',availableon theDCLGwebsite:http://www.communities.gov.uk/documents/corporate/pdf/146871.pdf

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Annex 2: Valuing Non-market Impacts

beinferred.However,theycannotestimatethevalueplacedonanassetbypeoplewhomakenodirectuseofit.Inthese circumstances,statedpreferencemethodsmaybehelpful.Insomecases,itwillbeappropriatetousebothtechniques togetherto,forexample,checktheconsistencyofresults.

Other approaches

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Anewer,`subjectivewell-beingapproach'hasbeengainingcurrencyinrecentyears.The`lifesatisfactionapproach' looks at people's reported life satisfaction in surveys such as the ONS's Integrated Household Survey, which began includingquestionsonrespondents'subjectivewell-beinginApril2011.Thelifesatisfactionapproachuseseconometrics toestimatethelifesatisfactionprovidedbycertainnon-marketgoods,andcovertsthisintoamonetaryfigurebycombining itwithanestimateoftheeffectofincomeonlifesatisfaction.

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Atthemoment,subjectivewell-beingmeasurementremainsanevolvingmethodologyandexistingvaluationsare not sufficiently accepted as robust enough for direct use in Social Cost Benefit Analysis. The technique is under development,however,andmaysoonbedevelopedtothepointwhereitcanprovideareliableandacceptedcomplement tothemarketbasedapproachesoutlinedabove.Inthemeantime,thetechniquewillbeimportantinensuringthatthefull range of impacts of proposed policies are considered, and may provide added information about the relative value of non-marketgoodscomparedwitheachother,ifnotyetwithmarketgoods.2

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Asecondapproach,whereadirectassessmentofthevalueofabenefitorcostisparticularlyuncertain,istomake referencetothecostsofpreventingthelossof,orreplacing,anon-marketedgood(suchasanaturalhabitatorrecreational facility).Thisdoesnotprovideameasureofitsvaluebutcanprovideafiguretofocusdiscussionuponwhetherthegood isworthasmuchasthisexpenditure.

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In the absence of an existing reliable and accurate monetary valuation of an impact, a decision must be made whethertocommissionastudy,andifso,howmuchresourcetodevotetotheexercise.Keyconsiderationsthatmay governadecisiontocommissionresearchare:

Tractabilityofthevaluationproblem:whetherresearchislikelytoyieldarobustvaluation; Rangeofapplicationoftheresultsofastudytofutureappraisals; Howmaterialtheaccuracyofthevaluationistothedecisionathand.Thismaybegaugedthroughsensitivity analysisaroundarangeofplausibleestimates;and, Scaleofimpactofthedecisionathand. Ifthedecisionrelatestoamulti-billionpoundprogrammeorto regulation that will impose costs of similar scale upon industry, it is clearly worth devoting much more resourcetoensuringthatthevaluationsofthenon-marketbenefits(andcosts)areaccuratethanwould beappropriateforasmallerscheme.

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Itisoftendifficulttoassessthereliabilityofestimatesemergingfromasinglestudyusingasinglemethod.Valuations maybeunreliablebecauseresponsestoquestionnairesmaybeinconsistentorbiased,orbecausevaluationsmaytake insufficient account of budget constraints. Estimates can be given more credence if different methods, or studies by differentresearchers,givesimilarresults.

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Whenusinganytechnique,itisadvisabletoprovidearangeofvalues,andtosubjecttheestimatedvaluestoa plausibilitycheckwithdecisionmakers.Theminimumormaximumvaluationofabenefitorcostthatwouldsupporta particulardecision(`switchingvalue')shouldbemadeexplicit,comparedwiththerealorimpliedvaluationsderivedfrom previousdecisions,andqualifiedbyastatementoftherobustnessofthevaluationtechniquesemployed.

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Finally, there may always remain significant impacts that cannot sensibly be monetised. Sometimes, they can nonethelessbequantifiedinnon-monetaryunits.Otherwise,theycanbedescribedinqualitativeterms.Whateverthe case, material costs and benefits that cannot be valued in monetary terms should clearly be taken into account in the presentation of any appraisal or evaluation. Chapter 5 contains guidance on considering unvalued costs and benefits, includingMultiCriteriaDecisionAnalysis.

2 AfullerdiscussionofthelifesatisfactionapproachcanbefoundintheGreenBookdiscussionpaper,FujiwaraandCampbell(2011),`ValuationTechniquesforCost BenefitAnalysis:StatedPreference,RevealedPreferenceandSubjectiveWell-BeingApproaches',availableontheHMTwebsite:http://www.hm-treasury.gov.uk/d/ green_book_valuationtechniques_250711.pdf

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