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

1 Introduction
The Green Book refers to two techniques for the valuation of non-market impacts: Stated
Preference and Revealed Preference methods. Stated Preference uses specially constructed
questionnaires to elicit estimates of people‘s Willingness to Pay for (or Willingness to Accept) a
particular outcome. Revealed preference observes people‘s behaviour in related markets. These
‗preference-based‘ techniques have been in use for some time as an essential part of Social Cost-
Benefit Analysis. During this time, the behavioural sciences and other research has built up an
evidence base about the potential uses of these methods, as well as their limitations.
In contrast to these preference-based techniques, a newer, ‗subjective well-being‘ approach, has
been gaining popularity in recent years, which attempts to measure people‘s experiences rather
than expose their preferences. The Life Satisfaction Approach uses reported life satisfaction in
surveys such as the ONS‘s Integrated Household Survey, which began including questions on
respondents‘ subjective well-being in April 2011, to value non-market impacts. The approach
uses econometric methods to estimate the life satisfaction provided by non-market goods, and
this is then converted into a monetary figure by also estimating the effect of income on life
satisfaction. The approach therefore assesses the impact of policies on how people think and
feel about their lives as a whole, instead of assessing impact based on what people say they
want and what they choose.
This paper has been written with three main objectives in mind:
First and foremost, to demonstrate that the valuation of non-market goods, and
specifically the measurement of well-being, is a live research issue across government
and academia, and one which Departments should be challenged to pursue further.
To provide an introduction to how analysts should go about applying all three
approaches in practice.
To cover the strengths and weaknesses of the three methods in detail to enable analysts
to use the findings generated appropriately and interpret them with the appropriate
degree of caution or enthusiasm in order to provide decision makers with high quality
advice. Specifically in this regard, we recognise that subjective well-being at the
moment remains an evolving methodology, but one which may soon provide a
complement to the more traditional economic approaches. In the meantime, it can play
an important role in challenging analysts and decision makers to think about the full
range of social impacts, and may give us a better idea of the relative value of non market
goods‖.
The rest of the paper proceeds as follows. Chapter 2 presents a brief overview of the economic
theory underlying applied valuation. A concise description of the practical methodology of the
three valuation approaches is laid out in Chapter 3. Chapter 4 contains the bulk of the paper
and presents a comprehensive overview of the strengths and weaknesses of all three
approaches. In particular the Chapter draws on findings from the field of behavioural economics
which have shaped recent discussion on valuation in the economics literature. Chapter 5 builds
on the discussion that precedes it to provide more detail on how to apply the life satisfaction
approach in practice. This Chapter is written in order help Departments pursue the life
satisfaction research agenda further. Chapter 6 discusses some issues that are likely to attract
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