would rely on donors’ willingness to contribute and, hence, to pay for inputs purchased in ordinary markets, as indicative of the value of outputs to them. If this approach were adopted, one would also need to account somehow for output financed by profits generated through user fees and auxiliary activities, which vary greatly across industries. Also, “free-rider” behavior, leading to suboptimal donations, can be expected to generate expenditures on inputs that fall short of efficient levels, although tax subsidies to donee organizations (exemptions from taxes on property, sales, and profits) and the deductibility of donations on personal income tax returns exert a countervailing effect. It is likely that, in the nonprofit sector, the observed levels of output are short of those at which the aggregate willingness to pay for marginal output equals the marginal supply cost, but this is not certain.

What, then, are the options for measuring the value of nonmarketed outputs or, more generally, outputs that, if not provided at a price of zero, are offered at subsidized prices? Even when market prices are available as indicators of value, the appropriate measure depends—as we note throughout this report—on the use to which an output measure is to be put. Information needed for benefit-cost analyses is not the same as that needed for assessing growth of output or of economic welfare over time. Both differ from the data captured in national accounts that are based primarily on transactions prices and that in many cases value inputs and outputs at zero when no explicit prices are paid. To see this, consider cases in which public policy involves decisions about the efficiency of a governmental action—a plan to construct a dam, a new environmental pollution regulation, or an increase in funding for basic science research through the National Institutes of Health or the National Science Foundation. The benefit component of benefit-cost analysis requires, conceptually, valuation of the aggregate willingness to pay for the proposed outputs, amounts that encompass the total area under all beneficiaries’ demand functions, not simply estimates of the marginal value to society of the dam, the environmental protection, or the research.

Acknowledging the difference between measurement for benefit-cost analysis and measurement for consistency with national economic accounting is critical for both the government and nonprofit sectors. Benefit-cost analysis addresses an explicitly normative question of whether a particular output is “worth” the cost of producing it, which requires measuring the total value of a specified quantity of a public- or nonprofit-sector activity for comparison with the associated cost. To this end, the value of public goods can be estimated by the sum of consumers’ willingness to pay as derived from surveys that would in principle, but with great complexity in practice, capture consumer surplus, or by some imputation from observed behavior.4 By contrast, measurement of the output of public goods that


The survey approach to output valuation for goods and services not generally provided in private markets has been used to estimate values of cleaner air and community ambulance services, but it remains a controversial methodology. For an overview of the debate on contingent valuation, see Portney (1994) and the other articles in the same issue of the Journal of Economic Perspectives.

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