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

40
illusion. Instead, respondents are simply asked to provide a subjective assessment of their overall
well-being which is then matched with objective measures of the determinants of well-being
and their exposure to the non-market good. Using panel data we can track the effects of a nonmarket
good over time and therefore fully estimate the degree of adaptation. Furthermore,
people are not required to have perfect information about the good being valued and there is
no (hypothetical) payment involved and so this solves for the problems related to the payment
vehicle in stated preference techniques.
If variables are measured accurately, increased consumption of a non-market good or service
should show up in changes in well-being and thus values, therefore reducing the risk of
insensitivity to scope. Although it has not been tested empirically, sub-additivity and sequencing
effects should also logically disappear. The resulting value estimate will be calculated on the
basis of how people are actually affected by the good over time.
Finally, since the analyst in effect calculates the marginal rates of substitution between income
and the non-market good there is no potential for errors to occur due to people‘s inability to
convert subjective feelings and beliefs into a monetary scale.
On the other hand, we have highlighted that contextual factors can have large effects on
people‘s reported well-being and there may be biases inherent to the way that people report
their well-being to the surveyor. This means that reported measures of well-being may be pick
up highly irrelevant factors which would bias any estimated statistical relationship between life
satisfaction and the variable of interest, say income or employment.
The life satisfaction approach typically involves conducting econometric analysis in order to
estimate the true causal effect of both income and the non-market good of interest on reported
life satisfaction. For a number of reasons outlined above this is extremely challenging and often
requires rich data sets and careful econometric analysis. Many of the valuations which have been
generated so far are implausibly high. Most of the reasons for this are likely to have been
addressed in this chapter. The approach is still very much in development in the academic
literature.
The robustness of a valuation generated by a given study using any of the three valuation
methods, and therefore the appropriateness of including it in Social Cost-Benefit Analysis,
should always be assessed on a case-by-case basis. However, given the relative infancy of
approaches that utilise reports of life satisfaction to derive valuations, we suggest relatively more
caution be exercised regarding this method. Instead, we recommend that the life satisfaction
approach to valuation be currently regarded as a complement to the more standard preferencebased
approaches, especially where good data on life satisfaction are available.
Nevertheless, even when the valuations derived from a specific life satisfaction study cannot be
considered robust enough for Social Cost-Benefit Analysis due to the reasons outlined here, the
valuations and their description can still be of value. It is likely that the study may still be able to
indicate the approximate magnitude of an impact thereby allowing decision makers to refine the
values that they may otherwise place implicitly on these impacts.