Valuation Techniques for Social Cost-Benefit Analysis: - HM Treasury

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o Market imperfections
o Measuring WTP for non-marginal changes
o Marshallian versus Hicksian demand
Life Satisfaction Approach
o Cost-effective
o Reasonably wide application
o Fewer survey-related biases
o No market structure assumptions
o Difficulties in estimating the marginal utility of income
o Difficulties in estimating the marginal utility of the non-market good
4.3.1 Stated Preference Methods
Advantages
i) Wide application and specific valuations
Stated preference methods can, in principle, be used to value any specific non-market good.
Choice modelling methods can also be used to estimate the value of the attributes of a nonmarket
good. This can be useful if different policy options differ in the attribute levels that they
provide (Mourato et al, 2005).
ii) Allows one to explore the reasons behind preferences
Stated preference questionnaires can include questions relating to:
o the respondent‘s characteristics or attitudes toward the non-market good; and
o the reasons behind the respondent‘s choices or answers to the WTP/WTA questions.
Exploring the variation in responses is useful for identifying the winners and losers of an
intervention. This is useful for stakeholder analysis (Bateman, 2002). It is also helpful that,
through the development of a primary questionnaire, groups can be defined by characteristics
which are typically unobserved on the conventional datasets used in revealed preference or life
satisfaction studies.
Uncovering the reasons behind respondents‘ answers can also be helpful. For example, in
hedonic pricing studies, it is often identified that house prices increase with the air quality in
their neighbourhood (Smith and Huang, 1995). The exact reason for this correlation is often not
clear. For example, it could be due to lower cleaning bills, the neighbourhood being more
aesthetically pleasing, or due to the health damages associated with polluted air (Portney,
1981).
iii) Ex-ante application
The value of any specific policy or intervention can be estimated before it is actually
implemented. Therefore stated preference methods can aid decision-making at an early stage of
the policy cycle. Other valuation methods can be used ex-ante however they rely on an implicit
assumption that the preferences revealed in the past do not change in the future.
iv) Widely used and researched
There have been a large number of applied contingent valuation studies. Carson et al (1995)
present a bibliography of over 2000 studies from more than 40 countries and Carson (2004)
presents a bibliography that exceeds 5000. In addition to application, the reliability and