Appendix Two - Common CBA Valuation Techniques
Market Prices
These values are the easiest to incorporate into a cost benefit analysis, and are the prices at which goods or services are traded in the market.
Shadow Prices
Sometimes the market prices of goods or services do not reveal the true cost or value of those goods or services. For example, a subsidy on butter is likely to make the price of butter lower than the true cost of the resources that went into making it. The true cost would instead be the price of the butter, plus the value of the subsidy per item.
Revealed Preference Testing
This approach compares situations where people have previously made trade-offs between costs, such as their health or quality of life, and some form of benefit. Such statistics can give an indication of the extent to which people are prepared to pay for certain benefits.
Stated Preference Testing
This approach involves surveying people to identify their preference for trading off costs and benefits against stated hypothetical scenarios. This is the method that was used in New Zealand to estimate the "statistical" value of life in the transport sector (estimated at $2 million - June 1991 dollars).
Travel Cost Analysis
This approach uses the value of traded goods and services to estimate the value of non-traded goods. For example, the value of a recreational park to people might be calculated as the sum of the costs incurred by people travelling to the park (including travel time). This would obviously result in a minimum value for the park, as it ignores what is likely to be a significant level of consumer surplus (the value to the consumer above what is paid).
Hedonic Pricing
Hedonic pricing uses the different characteristics of a traded good to estimate the value of a non-traded good. For example, the value of a piece of lakefront could be calculated by comparing the price of a house on the lakefront with the price of a similar house located elsewhere.
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