Loomis, John B.

English

Research Papers in Economics

CHOICES
The magazine of food, farm, and resource issues
3rd Quarter 2005 • 20(3) CHOICES 179
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3rd Quarter 2005 • 20(3)
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Economic Values without Prices:
The Importance of Nonmarket Values
and Valuation for Informing Public Policy 
Debates
By John Loomis
In the U.S., continued improvements in human health
and well-being increasingly depend on improving the
quality of our environment. The quality of the air we
breathe, the water we drink, and the water quality of rivers
and lakes we recreate in, affect our mental and physical
well-being, in many ways. Yet, these valuable services of
clean and natural environments are not directly priced in
markets. As such, they tend to be overlooked by some pol-
icy makers who mistakenly believe that the only values
that count are market revenues or local jobs. However,
people do receive economic benefits from clean and natu-
ral environments because these environments provide util-
ity. With our rising incomes and increasingly scarce
natural environments, environmental quality is becoming
increasingly valuable to us.
But, how do we quantify the economic values that
clean and natural environments provide to people if there
are no explicit market prices? To answer
that question, economists have devised
techniques of using implicit or simulated
markets to estimate the monetary values
of environmental quality. Most of these
techniques are based on the fact that peo-
ple do or will make trade-offs or sacrifices
of other market goods or income in order
to consume higher levels of environmen-
tal quality. The fact that people will pay
more for houses, accept lower paying jobs,
or travel further to visit areas of higher environmental
quality should convey to policy makers that environmental
quality has an economic value, dollar per dollar as valuable
as many market goods. 
Economic valuation of environmental quality has the
potential to bring a more balanced perspective to the allo-
cation and management of natural resources. Environ-
mental valuation allows benefits received by society to be
compared to the monetary costs and to
the opportunity costs of other foregone
investments. The inclusion of monetary
estimates of the economic value of envi-
ronmental quality allows for more formal
consideration of these values in the deci-
sion making. Essentially, economic valu-
ation of environmental quality allows
those benefits to be treated equally, dol-
lar per dollar, with market goods and
costs, so as to ensure that society receives
the maximum benefit from all its scarce resources whether
marketed or not. 
Articles in this Theme:
Economic Values without Prices: The Importance of 
Nonmarket Values and Valuation for Informing Public 
Policy Debates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
The Road Less Traveled: Revealed Preference and Using the 
Travel Cost Model to Value Environmental Changes . 183
Can Stated Preference Valuations Help Improve 
Environmental Decision Making? . . . . . . . . . . . . . . . . . 189
Benefit Transfer – The Quick, the Dirty, and the Ugly?. . . 195
Nonmarket valuation is used to 
infer values for items that are not 
subject to markets like 
environmental services or health. 
Generally people are not charged 
for swimming in a public river or 
cleaner air. When a project is 
proposed that affects such 
activities, nonmarket valuation is 
employed to estimate 
project benefits.180 CHOICES 3rd Quarter 2005 • 20(3)
Estimating monetary benefits for
environmental quality avoids several
problems that often plague policy
debates. First, valuation avoids the
frequent false characterization of
some polices as being a choice
between “the economy versus the
environment.” Economic valuation
of environmental quality demon-
strates that the environment is a
source of utility to people. Although
environmental quality has some sub-
tle differences from commodities
because environmental quality is a
public good rather than a private
good, this should not obscure the fact
that the environment is a source of
economic benefit to people. Rather,
the subtle distinction that the envi-
ronment is a public good usually
means that society cannot count on
markets to provide economically effi-
cient levels of the public good. For
example, once the air is kept clean for
one person it is available to everyone
else in that town at no additional cost
(i.e., air quality is nonrival). This fea-
ture makes it inefficient to charge
additional people for consuming the
cleaner air or to try to exclude non-
payers (which is often not technically
possible for most public goods). 
Second, environmental valuation
often demonstrates that most public
policies need not be “all or nothing.”
That is, the first few acres of wetlands
protected probably have higher val-
ues for the ecosystem services pro-
vided than an additional acre of corn
or soybeans in the Midwest. Finally,
economic valuation of benefits and
costs provides input to decisions
makers on the question of “how clean
is clean enough, how safe is safe
enough?”  Although economics
should not be the final word on these
important decisions, neither should
the technical pursuit of purity over-
whelm common sense. Beyond some
threshold level of cleanliness or
safety, additional cleanup or precau-
tions cost society more than the value
of the gain in safety. Diminishing
marginal returns apply to safety or
cleanliness too just as much as to fer-
tilizer application. 
However, without a common
monetary metric to compare cost and
benefits, it is difficult to know when
we have reached that point of dimin-
ishing returns. Hence, the usefulness
of valuation techniques is their ability
to inform policy makers and stake-
holders about how the benefits and
costs change with different levels of
food safety or water quality. With
this information on economic effi-
ciency, in conjunction with concerns
about equity and distributional issues
(e.g., environmental justice), policy
makers can make more informed
trade-offs. 
But just how valuable is the eco-
nomic valuation work of economists?
Posed a different way, "Are the bene-
fits of these studies, in terms of more
efficient use of natural resources,
worth the costs of these studies?"
This is a tough question, one asked
in many fields including weather
forecasting and flood prediction.
Given that policy decisions are (and
should be) affected by many concerns
besides economic efficiency (e.g., dis-
tributional equity, sustainability), it is
rare to be able to point to any one
information source in the policy pro-
cess and say it was the definitive fac-
tor. Nonetheless, it would appear
foolish to make million-dollar, and
sometimes billion-dollar, decisions
without carefully considering the full
range of benefits and costs of the
available alternatives. 
Concepts of Nonmarket 
Valuation
The same concept of value used to
value market goods is used to value
nonmarket resources: willingness to
pay. Price in the market is just will-
ingness to pay for one more unit of
the good. Without markets we do
not have prices, but trade-offs that
people make often demonstrate a
willingness to pay. Nonmarket valua-
tion is much like detective work in
attempting to infer the monetary
willingness to pay for environmental
quality from bundled transactions
such as home purchases, jobs
accepted, or distances traveled for
recreation. It is well accepted in real
estate transactions that location mat-
ters. Part of that location is proximity
to desirable environmental amenities
(e.g., parks, good air quality) and dis-
tance from undesirable features (e.g.,
confined animal feeding operations).
Because environmental amenities are
scarce, buyers compete for houses
with closer proximity to environmen-
tal amenities or higher levels of envi-
ronmental quality, bidding up prices
of these houses. Statistical analysis
allows economists to disentangle the
portion of the house price differential
due to the location being nearby
environmental amenities. This allows
calculation of how much people have
paid for the higher levels of environ-
mental quality. 
Recreational fishing and boating
also provides a benefit to its partici-
pants. It is a benefit they would, if
they had to, pay more for than the
current nominal fishing license fee or
boat launch fee. The fact that they do
not have to pay "what the market will
bear" results in the visitor retaining a
"consumer surplus" as extra income
in their wallet or purse. Much like
irrigation water from publicly pro-
vided projects that is not sold at its
market clearing price, neither is rec-
reation, yet both have economic
value greater than their administered
prices. 3rd Quarter 2005 • 20(3) CHOICES 181
In the case of recreation, econo-
mists rely on visitors’ travel behavior
to trace out a demand curve for recre-
ation at a particular site. From the
demand curve, we can estimate the
additional amount a visitor would
pay, if they had to, for continued
access to the recreation resource. This
actual behavior-based approach is
referred to as the Travel Cost Method
(TCM); discussed more in detail in
Shaw’s article in this issue. Because
different visitors live at different dis-
tances from the site, the analyst can
observe how the number of trips
taken varies with variations in travel
costs to the site. Essentially we
observe spatially varying prices.
Thus, the demand curve can be esti-
mated by multiple regression using
this cross-section data on travel costs
(as proxies for price) and number of
trips taken each season. By observing
how recreation visitation changes
with increased river flows, higher res-
ervoir levels, and improved water
quality, economists can statistically
estimate the demand shifts for
improved water resource conditions.
From these demand shifts, the addi-
tional dollar amount a visitor would
pay for the improved water resource
condition can be calculated. 
Recreation, however, is only half
the story. Many individuals who may
never fish or boat still receive some
benefits from just knowing that free
flowing rivers exist (Sanders, Walsh,
& Loomis, 1990) or endangered spe-
cies exist (Loomis & White, 1996).
In these cases, all households would
be asked to pay for protection of
resources. Today, this is done in the
form of a hypothetical referendum,
where households are asked if they
would vote in favor of a particular
resource management action, if it
costs their household $X. The analyst
varies the monetary magnitude of $X
across the households (some get a
high amount, some get a low
amount), so that a demand-like rela-
tionship can be traced out. From this
demand curve, willingness to pay is
calculated. This technique is com-
monly referred to as the Contingent
Valuation Method (CVM). This sur-
vey-based approach can be used to
value either recreation or existence
values (often referred to as passive use
values). Tom Stevens talks in more
detail about these stated preference
methods in the following article in
this issue. 
Agency and Court Acceptance of 
Nonmarket Valuation
Many federal and state agencies use
nonmarket valuation to provide
information on the economic bene-
fits and costs when making natural
resource allocation decisions. Begin-
ning in 1979, Federal agencies such
as the U.S. Army Corps of Engineers
and Bureau of Reclamation were
required to use the travel cost
method and contingent valuation
methods to value recreation benefits
at projects with high visitation levels
(U.S. Water Resources Council,
1979). During the 1980s, the U.S.
Army Corps of Engineers published
manuals on how to perform the con-
tingent valuation method (Moser &
Dunning, 1986). Today, the U.S.
Bureau of Reclamation maintains a
staff of several economists who are
trained in and publish in the area of
nonmarket valuation. Federal agen-
cies such as the Environmental Pro-
tection Agency (EPA), which are
required to conduct benefit-cost
analyses of environmental regula-
tions, frequently perform or rely
upon existing TCM and CVM stud-
ies to provide estimates of nonmarket
benefits. The National Park Service
utilizes nonmarket values in its evalu-
ation about whether to remove dams
on the Elwha River that are blocking
salmon migration in Olympic
National Park (National Park Service,
1995) and in natural resource dam-
age assessment. 
When Congress passed the Com-
prehensive Environmental Response,
Compensation, and Liability Act of
1980 (CERCLA), the U.S. Depart-
ment of the Interior adopted CVM
as a valuation method for valuing the
loss in recreation and existence values
from toxic waste sites and hazardous
materials spills (U.S. Department of
the Interior, 1986). Although indus-
try challenged the use of CVM, the
Court of Appeals upheld CVM, and
ordered the Department of the Inte-
rior to broaden its use to measure
existence values (what the court
called passive use values) even when
there was direct, on-site recreation
use of the resource (State of Ohio vs.
U.S. Dept. of the Interior, 1989).
Consistent with economic theory, the
court saw recreation use and exist-
ence values as additive. 
The Exxon Valdez oil spill put
CVM in the spotlight. When Con-
gress passed the Oil Pollution Act of
1990, the responsible agency, the
National Oceanic and Atmospheric
Administration (NOAA), recom-
mended CVM be used to measure
both the recreation and passive use
values lost due to oil spills. Given the
controversy surrounding this, NOAA
appointed a blue ribbon panel chaired
by two Nobel Laureates to assess the
reliability of the CVM for measuring
passive use values. In its report in
1993, the Panel concluded that care-
fully designed and implemented
CVM studies could provide estimates
of passive use/existence values that
would serve as a useful starting point
for administrative and judicial deci-
sions (Arrow et al., 1993). 
Nonmarket valuation is not lim-
ited to federal agencies. Numerous182 CHOICES 3rd Quarter 2005 • 20(3)
state agencies use TCM and CVM
for valuation of recreational fisheries
and hunting. The states of Arizona,
California, Idaho, Maine, Michigan,
Montana, New Mexico, Texas, and
Wisconsin (just to name a few) have
all sponsored nonmarket valuation
surveys resulting in TCM- and
CVM-derived values for hunting and
fishing in their respective states. The
State of California used CVM and
measurement of existence values for
protecting Mono Lake as a bird habi-
tat, but also for assessing the damages
of oil spills. 
Conclusion
What can nonmarket valuation con-
tribute to better policy making? In
some cases it can change the charac-
ter of the debate from being "the
economy versus the environment" to
one of recognizing people care about
the environment in the same way
they care about market goods. In
other situations, nonmarket valua-
tion can bring balance to questions of
“how safe is safe enough?” given
scarce resources in society. What is
the value of valuation? The value lies
in providing a more complete
accounting of the benefits and costs
to all of the people. For without eco-
nomic valuation, the predictions of
the public choice economists are fre-
quently realized: (a) those who would
bear concentrated costs can block
resource reallocations that benefit
society as a whole, and (b) those few
that stand to gain concentrated bene-
fits can spread even larger costs out
over millions of taxpayers. Valuation
studies have the potential to provide
an effective way to diminish the often
bemoaned role of special interests in
the current policy process. Although
policy makers and society will often
have other objectives in addition to
economic efficiency, more informed
trade-offs can be made between
objectives if the benefits and costs of
each alternative are known. Although
it is true that benefits and costs are not
all that matter, it is rare that benefits
and costs do not matter at all to public
decision makers and society. 
For More Information
Arrow, K., Solow, R., Portney, P., 
Leamer, E., Radner, R. & Schu-
man, H. (1993). Report of the 
NOAA Panel on Contingent Val-
uation. Federal Register, 58(10), 
4602-14. 
Loomis, J., & White, D. (1996). 
Economic benefits of rare and 
endangered species: Summary 
and meta-analysis. Ecological Eco-
nomics, 18(3), 197-206.
Moser, D., & Dunning, M. (1986). 
A guide for using the contingent 
valuation methodology in recre-
ation studies, National Economic 
Development Procedures Manual--
Recreation Vol. 2, IWR Report 
86-R-5. Institute for Water 
Resources, Fort Belvoir, VA: U.S. 
Army Corps of Engineers.
National Park Service. (1995). Elwha 
River Ecosystem Restoration. Final 
Environmental Impact State-
ment. U.S. Dept. of the Interior: 
Denver Service Center, National 
Park Service. 
Sanders, L., Walsh, R., & Loomis, J. 
(1990). Toward empirical estima-
tion of the total value of protect-
ing rivers. Water Resources 
Research, 26(7), 1345-58. 
State of Ohio v. U.S. Department of 
the Interior, No. 86-15755 (US 
D. Ct. App. D.C. July 14, 1989).
U.S. Department of the Interior. 
Federal Register: Natural resource 
damage assessments, final rule. 
Washington, DC; 1986, 51(4), 
27674-753. 
U.S. National Oceanic and Atmo-
spheric Administration. Federal 
Register: Oil Pollution Act dam-
age assessments, final rule. Wash-
ington, DC; 1996, 61(4), 439-
510. 
U.S. Water Resources Council. Fed-
eral Register: Procedures for eval-
uation of National Economic 
Development (NED) benefits 
and costs in water resources plan-
ning, final rule. Washington DC; 
1979, 44(242), 72892-976. 
U.S. Water Resources Council. 
(1983). Economic and environ-
mental principles and guidelines 
for water and related land 
resources implementation stud-
ies. Washington, DC: U.S. Gov-
ernment Printing Office. 
John Loomis (jloomis@lamar.colo
state.edu) is professor, Department of
Agricultural and Resource Economics,
Colorado State University, Fort Col-
lins, CO.

Economic Values without Prices: The Importance of Nonmarket Values and Valuation for Informing Public Policy Debates

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