The economic concept of value provides the foundation for neoclassical welfare economics, which has its roots in utilitarianism. Economic value expresses the degree to which a good or service satisfies individual preferences. These preferences can be expressed in terms of utility, an unobservable ranking of preferences, or a less theoretically appealing, but more practical money matrix. Thus, economic value can be measured by the amount of money an individual is willing to pay for a good or service or the amount of money an individual is willing to accept as a compensation for forgoing the good or service. Willingness to pay (WTP) and willingness to accept (WTA) are measures that can be revealed in exchange. Many goods and services are exchanged on a market, which automatically reveals their value. The market, however, is capable of revealing only one component of the total economic value. This component, known as direct use value, refers to WTP or WTA for only an actual use of the good or service. The direct use component tends to dominate the total value of most ordinary (non environmental) goods such as books purchased to be read, food bought to be eaten, or cars acquired for transportation.
For some natural resources, their value is almost exclusively related to their direct use. The primary example of such a natural resource is crude oil. We are willing to pay for it only as much as the energy it creates is worth to us. Many other natural resources are also highly valued for their direct use, although, direct use may be only one of several components that contribute to their overall worth. For example, lakes, oceans and rivers can be used for swimming, fishing or enjoying water sports; forest are sources of timber, mushrooms, berries, herbs, as well as recreational opportunities; wetlands provide opportunities for bird watching.
Many goods and services, especially environmental ones, are valued for reasons not related to a direct use. However, no consensus exists in the academic community as to what set of categories is truly exclusive and exhaustive in capturing the remaining elements of the total value. The discussion that follows presents these components of value and their relationship to each other (see Figure 1) in a manner that represents the interpretation most commonly agreed upon by environmental economists.
Use Value Components
Total value consists of two main elements: use value and nonuse value. Use value captures indirect use in addition to direct use as described previously. Indirect use is related to special functions of some ecosystems. For example, lakes, oceans, and rivers assimilate waste, and provide habitats for wildlife; forests act as carbon sinks, prevent soil erosion and encourage soil production; wetlands offer flood control and trap nutrients and sediments.
Goods and services may also be valued for their potential to be available in the future. These potential future benefits constitute an option value, a concept first introduced by Weisbrod in 1964. It may be thought of as an insurance premium one may be willing to pay to ensure the supply of the environmental good later in time. For example, people may be willing to pay for preserving biodiversity or genetic materials to ensure the option of having these goods in the future. This value component is a controversial element of the total value. There is no consensus even among environmental economists as to the exact placement of option value among use and non-use components. The possible interpretations are schematically represented by dotted lines in Figure 1. Some consider option value to be one of the use components, which suggests that it is value of assuring future direct or indirect use of the good. Others interpret it as a nonuse component, because option value is not related to any current use of the good. Some even argue that option value should be considered a separate value category in addition to the use and nonuse ones, thereby allowing it to capture both future use and nonuse benefits.
Nonuse Value Components
The final value component, known as nonuse value, was first proposed by John V. Krutilla in 1967. It captures those elements of value that are unrelated to a current, future, or potential use.
Existence value reflects benefits from simply knowing that a certain good or service exists. For example, some people derive satisfaction from the fact that many endangered species are protected against extinction. Many people are willing to pay for protection of these species’ habitats, even those located in remote, hard to access areas. Although those placing the value will most likely never travel to these places, or see the species, they nonetheless value the knowledge that such species exist.
Bequest value, the other nonuse component, refers to benefits from ensuring that certain goods will be preserved for future generations. For example, many of us are concerned with future damages from global warming and would be willing to pay to reduce them, despite the fact that the vast majority of the damages is expected to affect the Earth long after our generation is gone. Policies associated with either a long-term or irreversible impacts can lead to losses that consist primarily of bequest value.
Empirical estimates indicate that the nonuse component of total economic value may be not only a non-trivial, but a dominating component of the total value derived from environmental goods. Nonuse components often contribute over 50% of all benefits provided by some natural resources. For example, in a study conducted in 1990, Sanders and colleagues found the total value of protecting 15 rivers in Colorado to be $120 million annually, out of which only about one-fifth of the value was related to the rivers’ recreational (use) benefits and the other four-fifths to nonuse benefits. An even more striking result is provided by Loomis, who estimated the use value of Mono Lake in California in 1987 to be $5.8 million annually, and the nonuse value of the lake to be over $420 million! Both sets of results led to important conclusions. While the estimated value from Colorado suggests the importance of including nonuse values in total value estimates, the California results raise a question about validity of the nonuse value estimates. As mentioned previously, markets identify solely direct use value components. Therefore, in order to capture the total economic value, an alternative to market mechanisms has been developed. These mechanisms are various benefit valuation methods. A group of valuation methods known as indirect or stated preferences methods are specifically designed to capture the nonuse value component. Unfortunately, their ability to uncover actual values is controversial.
Freeman, A. M. 1993. The Measurement of Environmental and Resource Values. Theory and Methods. (Washington, DC, Resources for the Future).