of the value that purchasers attach to the marginal output. When explicit prices are not charged for output, as is common in the government and nonprofit sectors, buyers’ valuations of the outputs are not available.
It should be noted that, even when market prices are available, they reflect buyers’ willingness to pay for a marginal unit of output, not the willingness to pay for the entire value to them of the good or service. The difference between the two values, a matter discussed in earlier chapters, is attributable to the inclusion of consumer surplus in the latter but not in the former. For aggregate welfare measurement purposes, and to measure changes in welfare over time and across countries, information on consumer surplus is conceptually both relevant and important; the inclusion of consumer surplus in a satellite account for government or the nonprofit sector, however, would make that account incompatible with the NIPAs.
Even with a narrower focus on marginal valuations, problems associated with outputs having prices of zero remain. One alternative is to value such outputs by using the prices paid for the inputs to their production. When outputs are not sold, it is nonetheless true that their production typically requires purchased inputs of labor, raw materials, and capital (in addition to such donated inputs as volunteer labor). Aggregating market input values is, in fact, the methodology used to value the output of most government as well as nonprofit-sector services but, as we explain above, this procedure can be thought of as a pragmatic compromise when the alternatives are either to value those outputs at zero because they are not sold in the market or to value them at some positive, imputed, amount.
Asserting that outputs have values equal to the market values of the inputs with which they are produced imposes a strong, controversial assumption about output beneficiaries’ willingness (and ability) to pay. Whether incremental expenditures on national defense, basic research, charity services to the poor, or roads are “worth” their cost—not more, not less—remains a subject of active debate.
Ruggles (1983) defends the idea of measuring government output by the market value of inputs. The claim is that, in a democratic society, government will supply goods and services in amounts that reflect citizens’ willingness to pay taxes for their provision. It would follow that the total value of output is at least equal to the cost of the inputs. This perspective deserves further attention, but it is by no means unproblematic. It assumes that voters are well informed about the values of public-sector outputs, have the choice to vote on specific “earmarks,” and do not engage in strategic behavior, depending on the specific tax mechanism expected to be used to finance the activity. It also assumes consumers’ knowledge of that finance mechanism. In addition, this perspective relies on consumers’ (voters’) assessments of the total value of the service output, not the marginal values as would be captured by private market prices.
Whatever the merit of Ruggles’s political-economic rationale for valuing government output by the cost of the inputs used to produce it, essentially the same arguments and limitations apply to the valuation of nonprofit-sector activity. Instead of relying on majoritarian voting processes, for the nonprofit sector, one