Non market valuation of costs

Definition

Besides the difficulties of identifying all benefits and costs of a project there is a number of primary and secondary benefits and costs which cannot be valued directly by market mechanisms. The market fails to provide adequate prices for environmental assets such as

  • water in the river,
  • biodiversity,
  • sound wetlands etc.

These are common goods, which means that, in contrast to private goods, others can hardly be excluded from enjoying their benefits or suffering their costs. That is why the basic market mechanism of balancing demand and supply fails to determine the true economic value of many environmental assets. The difficulties increase further because many individuals and institutions are unfamiliar with most of the services and functions that ecosystem and biodiversity provide.

Methodology

In the face of this market failure there is a strong need to consider other means to assess the true value of unpriced environmental resources. In order to handle trade-offs between conservation and development, policymakers have to be aware of the value of natural resources. The non-market valuation of environmental costs and benefits can support decision-makers in how best to manage natural resources.

Non-market valuation methods are derived from two basic concepts namely

There is now a number of methods to estimate the value of environmental assets. Some of the most recognized methods are shortly presented on the following links. There are two categories of methods:

  • Stated preference methods: the concerned population is asked directly to indicate their WTP or WTA for any specific gain or loss.
  • Revealed preference methods: the estimates are obtained indirectly by drawing inference from observing the behaviour of concerned people in related markets.

Assessment

However, it has to be kept in mind that the value representation of environmental assets in monetary terms is only an approximate approach which is always subject to a certain degree of subjective judgement.


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Module
Cost-Benefit analysis
Source

TUHH

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Further Information

Tutorial:

Non market valuation of costs