Research and analysis

Valuation techniques for social cost-benefit analysis

The valuation of non-market impacts – stated preference, revealed preference and subjective well-being approaches.


Valuation Techniques for Social Cost-Benefit Analysis: Stated Preference, Revealed Preference and Subjective Well-Being Approaches

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By Daniel Fujiwara and Ross Campbell

The valuation of non-market impacts is a challenging but important area of economic appraisal. The full value of goods such as health, family and community stability, educational success and environmental assets cannot be inferred from market prices, but we should not neglect such important impacts in decision making.

This Green Book discussion paper therefore considers three techniques for the valuation of non-market impacts in terms of their strengths and weaknesses. Revealed preference and stated preference are two ‘market based approaches’ which have been referenced in the Green Book for some time. This paper introduces a third approach, involving the measurement of subjective well-being, which has been gaining currency in recent years.

Essentially, the robustness of the estimates generated by any of these techniques has to be considered on a case-by-case basis before inclusion in Social Cost Benefit Analysis. In particular, the estimates generated by the subjective well-being technique are not yet sufficiently accepted as robust enough for direct use in Social Cost Benefit Analysis. The technique is under development, however, and may soon provide a reliable and accepted complement to the more traditional economic approaches. In the meantime, the estimates may give us a better idea about the relative value of non-market goods compared with each other. They will also be important in encouraging consideration of the full range of social impacts of policies, and in encouraging reconsideration of the values that may otherwise place be placed implicitly on certain types of impacts.

Published 25 July 2011