Appendix C
Office of Management and Budget’s Guidance on Nonmarket Valuation Techniques

How should I value benefits that are indirectly traded in markets? Some benefits correspond to goods or services that are indirectly traded in the marketplace. Their value is reflected in the prices of related goods that are directly traded. Examples include reductions in health-and-safety risks, the use-values of environmental amenities (for example, recreational fishing or hiking and camping), and the value of improved scenic visibility. You should use willingness-to-pay measures as the basis for estimating the monetary value of such indirectly traded goods. When practical obstacles prevent the use of directly “revealed preference” methods based on actual market behavior to measure willingness-to-pay, you may consider the use of alternative “stated preference” methods based on survey techniques.

How should I value goods that are not traded directly or indirectly in markets? Some types of goods—such as preserving environmental or cultural amenities apart from their use and direct enjoyment by people (their so-called “nonuse” value)—are not traded directly or indirectly in markets. Estimation of the benefits for these types of goods is even more difficult than for indirectly traded goods, because market-related transactions do not exist to provide data for willingness-to-pay estimates.

Stated preference methods using survey techniques, such as contingent valuation methods, may provide the only analytical approach currently available for estimating the values of many of these goods, particularly goods providing “nonuse” values. The lack of observable behavior for these goods, combined with their complex and often unfamiliar nature, calls for careful design and execution of these surveys. Confidence in their results requires rigorous analysis of the responses and full characterization of uncertainties. The use of studies that rely on the state of the art in survey design and implementation is important to assuring confidence in the results. In addition, these studies should satisfy checks on their internal consistency. For example, you should apply a “scope”



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OCR for page 134
Analytical Methods and Approaches for Water Resources Project Planning Appendix C Office of Management and Budget’s Guidance on Nonmarket Valuation Techniques How should I value benefits that are indirectly traded in markets? Some benefits correspond to goods or services that are indirectly traded in the marketplace. Their value is reflected in the prices of related goods that are directly traded. Examples include reductions in health-and-safety risks, the use-values of environmental amenities (for example, recreational fishing or hiking and camping), and the value of improved scenic visibility. You should use willingness-to-pay measures as the basis for estimating the monetary value of such indirectly traded goods. When practical obstacles prevent the use of directly “revealed preference” methods based on actual market behavior to measure willingness-to-pay, you may consider the use of alternative “stated preference” methods based on survey techniques. How should I value goods that are not traded directly or indirectly in markets? Some types of goods—such as preserving environmental or cultural amenities apart from their use and direct enjoyment by people (their so-called “nonuse” value)—are not traded directly or indirectly in markets. Estimation of the benefits for these types of goods is even more difficult than for indirectly traded goods, because market-related transactions do not exist to provide data for willingness-to-pay estimates. Stated preference methods using survey techniques, such as contingent valuation methods, may provide the only analytical approach currently available for estimating the values of many of these goods, particularly goods providing “nonuse” values. The lack of observable behavior for these goods, combined with their complex and often unfamiliar nature, calls for careful design and execution of these surveys. Confidence in their results requires rigorous analysis of the responses and full characterization of uncertainties. The use of studies that rely on the state of the art in survey design and implementation is important to assuring confidence in the results. In addition, these studies should satisfy checks on their internal consistency. For example, you should apply a “scope”

OCR for page 134
Analytical Methods and Approaches for Water Resources Project Planning test to show that individuals are willing to pay more for incrementally greater amounts of a good. SOURCE: Office of Management and Budget (OMB, 2000, pp.10-11). Does the proposal permit or encourage use of methods of "contingent valuation" when quantifying the benefits and costs of environmental rules? Answer: Yes. The proposal recognizes that in certain situations important benefits arising from regulation affect goods or attributes that are not directly traded in markets (e.g., the improvement of “visibility” or the preservation of pristine wilderness areas). In these cases, the contingent valuation approach may provide the most suitable methodology for estimating such values. Where the analyst elects to use contingent valuation methods, the proposal cautions the analyst to follow several "best practices" to ensure that the resulting estimated values are reasonable and valid. Does the proposal permit agencies to present qualitative information about benefits and costs in situations where quantification is not feasible? Answer: Yes. OMB has always encouraged the agencies to do so. This draft continues that practice. SOURCE: OMB (2003).