HD.gov

Submit Content (login required)

Nonmarket Valuation

Last updated: 07/02/2009

Overview

  Nonmarket valuation is a method to estimate the value of goods and services that are not commonly bought and sold in markets. Whereas sales prices give very clear signals of the monetary value for goods and services that are routinely bought and sold, environmental project alternatives often must be converted and compared in monetary terms.

Credit: NOAA Coastal Services Center

General Considerations

  General Information
Nonmarket valuation determines a value for environmental outputs, such as a healthier ecosystem, an underwater reef viewshed, or a fish population that is less likely to become extinct, that can be factored into traditional economic cost-benefit analyses.
Specific economic tools can be used to estimate the economic value of environmental outputs. These tools include

• Using surveys designed to help respondents assign values to nonmarket goods or services (e.g., contingent valuation method)
• Studying market transactions that are influenced by the environmental good or service of interest (e.g., travel cost and hedonic pricing methods)
• Adapting estimates of value developed for one study area for use in another (benefit transfer method)

The results of these techniques remain estimates and are fundamentally different than actual prices realized in the marketplace. The estimates can be used in economic analysis, but practitioners should pay careful attention to potential sources of error. In many cases, it is extremely difficult, if not impossible, to measure all the nonmarket values involved in a planning decision, and you should be careful to point out values that are left out the analysis.

Application
Nonmarket valuation can be used to estimate the monetary value of the resources of marine protected areas to help guide management decisions. If, for example, fishing practices are damaging to a coral reef, contingent valuation methods can be used to estimate the value of those damages for comparison to the cost to fishermen of restricting the damaging practices. If the value of the damages prevented can be shown to be greater than the value of the incomes that will be lost, this serves as a strong economic justification of the regulatory practice.

Nonmarket valuation can also be used to estimate users'  willingness to pay for access to a resource for use in establishing access fees or to set enforcement penalties at a level that will be an incentive for compliance. Also, nonmarket valuation may be used in education and outreach to demonstrate the significance of a resource to business-minded stakeholders who are more accustomed to economic analysis.

Strengths and Limitations

 Strengths

• Can be used to facilitate the comparison of the value of market and nonmarket goods and services
• Can be used to estimate the value of almost anything
• Results can be analyzed in a straightforward manner
• Widely used and accepted for estimating total economic value
• Can be used in conjunction with cost-benefit analysis
• Provides information that can be used to justify complex management decisions

Limitations

• Some methods can be difficult, time-consuming, and expensive to apply
• Difficult to validate estimated values externally
• Highly vulnerable to sampling and methodology errors; if "wrong" people are surveyed, the value of the resource may be highly over- or underestimated
• Uses controversial techniques
• Methods relying on surveys require a high level of specialized expertise to create valid questions
• Need to accommodate a variety of factors

Examples and Case Studies

Willingness to Pay in Rocky Intertidal Ecosystems in Orange County, California Estimating how much visitors would be willing to pay to prevent further degradation to the rocky intertidal zone.

Entrance Fees for Marine Sanctuaries in the Philippines Determining how many tourists are willing to pay to dive in areas where fishing is prohibited.

Tools and Methods

 Specific Nonmarket Valuation Tools
Contingent Valuation
Surveys are used to help respondents estimate personal willingness to pay for nonmarket goods or services like clean beaches or healthy corals.

Travel Cost
Survey or observation is used to calculate the value of a recreational experience. An example would consider how much visitors are willing to pay for access to a resource, considering travel time, fuel, lodging, and entry fees.

Hedonic Pricing
Market transactions are compared for goods or services that differ primarily because of the influence of the nonmarket good or service that is of interest. For example, sales prices of similar homes could be compared where some overlook a healthy salt marsh and others do not. This comparison could estimate the value of the salt marsh to the market value of the homes that surround it.

Benefit Transfer
Estimates of value derived from a study of one area can be adapted for use in another area. For example, the value of sportfishing that will result from the restoration fisheries in northern California can be estimated using studies of similar fisheries in Oregon.

Related Tools and Methods

What If a Dollar Value Can't Be Assigned to The Outputs?
Cost-benefit analysis requires the conversion of all benefits and costs into common units - typically dollars. Because many environmental outputs cannot be easily measured in monetary terms, it may be possible to apply this tool in only a limited range of project decisions. There are, however, some other economic tools that can help managers make the best use of the limited resources at their disposal.

Incremental Cost Analysis (ICA)
When a project alternative differs primarily in geographic extent or levels of investment, ICA is a useful tool for identifying the most efficient alternative. The outputs do not have to be measured in dollars so long as they can be measured in common units, such as "acres restored."

For example, if it costs $50,000 to protect 10 acres of reef, but would cost an additional $100,000 to protect 5 more acres, and $250,000 to protect 3 more acres, at what point would it be more efficient to invest funds in other endeavors?

Cost Effectiveness Analysis (CEA)
When there is more than one way to achieve the same outcome, CEA is a tool for properly accounting for the costs of the different options to identify the one that is most cost-effective.

Contact Information
Please email partner@hd.gov for a list of partners who have expertise in cost benefit analysis.

Resources

 Publications

• Bateman, I.J., and K. G. Willis.1999. Valuing Environmental Preferences: Theory and Practice of the Contingent Valuation Method in the U.S., EU, and Developing Countries. Oxford; New York: Oxford University Press.
• Bjornstad, D. J. and J. R. Kahn. 1996. The Contingent Valuation of Environmental Resources: Methodological Issues and Research Needs. Cheltenham, UK; Brookfield, VT: Edward Elgar.
• Champ, P.A., K. J. Boyle, and T.C. Brown. 2003. A Primer on Nonmarket Valuation. Dordrecht; Boston: Kluwer Academic Publishers.
• Kopp, R.J., W.W. Pommerehne, and N. Schwarz. 1997. Determining the Value of Non-Marketed Goods: Economic, Psychological, and Policy Relevant Aspects of Contingent Valuation Methods. Boston: Kluwer Academic Publishers.
• NOAA Coastal Ocean Program. 1995. Economic Valuation of Natural Resources: A Handbook for Coastal Resource Policymakers. Decision Analysis Series Number 5.

Websites

• Ecosystem Valuation
  This link gives a complete overview of nonmarket valuation, includes case studies, and discusses the advantages and limitations of nonmarket valuation methods. This website is designed for noneconomists who need answers to questions about the benefits of ecosystem conservation, preservation, or restoration.
• The Contingent Valuation Method
  This link, developed by East Carolina University, describes the contingent valuation method, explains how the results can be used to estimate benefits and costs, and provides an example of a contingent valuation survey.