Valuation Part II: How We Quantify Full Value
Back in November, we discussed the subject of Valuation. We talked about the difference between the market cost of a 2x4 that we might use to build a new deck and the non-market value of forests providing clean drinking water. Valuation is a big picture concept that helps us understand the true value of goods and services, including their non-market benefits. We briefly touched on some specific techniques economists use to assign value to these items, and ended with a promise to look more closely at this topic in the future. Well, and the future is now.
Valuation is the study of calculating and applying a monetary value to goods and services that we normally see as priceless or undervalued in the market. While valuation is more widely used in the environmental field, its principles can and are applied to social conditions as well.
A note of caution: some people may have trouble understanding how we could possibly assign monetary values to nature or even our own lives. That’s perfectly understandable – a pristine lake is beautiful and we should never debase that beauty by thinking of it merely in terms of a price tag. And it may be wrong or even immoral to the great majority of us to think of a human life only in those terms.
However, NOT attempting to put a value on the things we cherish could be even worse. As consumer-voters, we make purchasing decisions every day based on money, and on a larger scale policy makers are constrained by a need to work within a set budget. So how do we know that all of our priorities are being considered if they don’t even have a value on paper? Further, if those services are not being even considered, how will they be equally and fully respected?
You may be thinking ‘okay, that’s all well and good, but exactly how do economists assign values to the invaluable?’ Well, you can find a wonderful on-line primer at Ecosystem Valuation. The authors do a great job of providing an overview of major topics and techniques and then drill down to detailed explanations if you’re interested in learning more. This blog is not meant to cover everything, but we will highlight some of the major methods.
To make sense of all the specific valuation approaches, one way is to put them in three major categories. The first is direct market-based techniques, or: How much do you actually spend on ecosystem goods and services like forests, clean water, and open space? One positive aspect of these methods is that we calculate actual money spent, and not worry about hypotheticals.
An example of a market-based technique is HEDONICS, which is analyzing how nearby services affect price differences of a given commodity, usually houses. We know that a house near water or park or a transit stop costs more than the exact same house away from such amenities. So we can valuate those services by analyzing the difference.
Another example is TRAVEL COSTS to a given highly desirable location. Think about it: Families take 2-week summer vacations to drive to Yellowstone. Why? Because it’s gorgeous, unique, and it’s “worth” our time and money. Conversely, you don’t spend your summer vacation driving to a sewage plant. So again, we simply analyze and aggregate expenditures to come up with a reasonable monetary value.
The second category includes those techniques that are market-related, or: How much would we have to spend to restore lost ecosystem services? The most common application is REPLACEMENT COSTS. This is pretty straightforward: How much would it cost to build a water treatment plant if we lose acres of forests and wetlands that do the same process for “free”?
The third category is a bit more subjective. Called CONTINGENT VALUATION, this approach simply asks people via surveys: How much would you to spend to protect an ecosystem? But, it’s not that simple. You can’t just ask people to give you a number out of the blue, as we would wind up with random and useless prices and values. Yet, over the years, this field has honed it’s techniques in polling questions, data interpretation, and analysis to provide reliable and defensible values for a wide range of applications.
While environmental valuation is probably more recognized and familiar, many of the social GPI Indicators use the same principles. An excellent example is the value of your own time. The simple method is to use your wage rate. But that’s far from complete as each hour and each task are different. For instance, would you sit in traffic for an hour if I gave you $15? Probably not. Would you babysit your adorable niece or nephew for $15? Probably…in fact you might do it for free!
So not all hours and tasks are created equal. If you’re still interested, I particularly like these two easy-to-read articles that provide more food for thought: Pure Wage Rate vs. More Comprehensive. For simplicity and consistency, you will notice that MD-GPI Indicators that relate to time – Volunteering, Housework, and Leisure Time – do in fact use average wage rates.
Now we get to the really controversial stuff: Ourselves. While the methodology of valuating our very beings and our actions is the exact same as above, we can’t deny that assigning monetary value to our fellow man is a far more emotional and visceral experience. Still, it’s being done now (please see chart below on the many values the federal government uses), and we must remember that failing to try would likely lead to far worse outcomes.
For example, a part of the calculation for the Cost of Family Changes is the cost of children watching television. Instinctively, we know that sitting on the couch watching TV for 4+ hours a day is undesirable and has academically cited detrimental effects: obesity, violence, reduced play time, less social interaction, and gender stereotyping to name a few. But what is the value of those losses? The GPI researched studies that employ many of the tools explained here, and employ 0.54 cents per hour watched.
And if you’ve come this far, how about a little further. What about the topic of Crime? If you get mugged and your new iPad is stolen, you’ll have to go out and buy a new one (or at least take the loss and go without.) But it doesn’t stop there, does it? That ‘feeling’ of being violated and accosted also has a value: just like your time and self worth. The US Department of Justice performed academic studies of these added mental impacts from Crime, and we rely on those figures rather than pure market-based losses.
While this blog is by far the longest we’ve written, we’ve really only tapped the surface. I encourage you, if you’re interested in learning more, to explore and read up on this fascinating topic and its techniques. But here’s the bottom line: however queasy valuating nature and humans may be to you, we need to come face to face with the fact that we already do it anyway on a subconscious level in the decisions we make daily. So we may as well take the next, necessary step and start including actual monetary figures in our economic markets, our social policies, and our budgets to help us make decisions that ensure a lasting, sustainable community and way of life.
Author: Sean McGuire
Office for a Sustainable Future, DNR
Previous questions and dialogue available below.
- Happiness is Oppressive?
- Location Matters
- Valuation Part II: How We Quantify Full Value
- New Interactive Tools at MD-GPI
- Beyond GDP: Year in Review
- Triple Bottom Line
- DYI GPI: So You Want to be a Czar?
- How Much are Those French Hens?
- The End Game: Happiness & Well Being
- Giving Something Back: Your Time
- Meet the Elephant: Valuation
- Income Inequality & its Effects on the MD-GPI
- The Case for New Measures of Growth & Prosperity
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