TECHNIQUES IN CBA:

MEASURING NON-MONETIZED COSTS

AND BENEFITS

SSR3013: PROJECT EVALUATION & CBA

■ Quantification of cost and benefit -> there are a
range of cost and benefit for which a value cannot
be easily obtained

■ Shadow pricing as a way of resolving the problem

of quantification

■ Shadow pricing is suitable when there is no market

value or market value which undervalues or is not
representative of true value of an asset or good.
Shadow pricing is suitable for
applying values to:
■ Environmental assets
■ Education
A range of method exist in attempting to quantify
■ Time-savings using shadow pricing
■ Accident reduction
■ Life Measure range of cost and benefit, or a
particular type e.g: time-saving

 Shadow pricing can be used to obtain a

valuation of the impacts of a project, whether
benefits or costs, using stated preferences
valuation or revealed preferences valuation.
Try this! IMPACTS (COSTS-BENEFITS) AND OTHER PARAMETERS REQUIRING
VALUATION
 Stated-preference valuation
■ One way to calculate a shadow price is to ask people
hypothetically how much they would pay for a specific benefit
or public good.

■ This approach is called stated-preference valuation and often

uses contingent-valuation surveys, which ask people to state
how much they would be willing to pay for a certain outcome,
such as a reduction in crime.

■ Stated or expressed preferences - involve the use of

either willingness to pay or willingness to accept measures of
a good or commodity
■ Willingness to Pay
If collecting data on benefits this measure will usually involve
asking an individual, using a survey or questionnaire, about
their willingness to pay for some sort of benefit, for example
improved journey times, or the preservation of a local park. The
willingness to pay method has been used in the UK to evaluate the
‘use value’ of an amenity to individuals.

■ Willingness to Accept
Equally a willingness to accept measure can be used. This
involves asking individuals how much they would be willing to
accept in compensation to consume more undesirable goods or
commodities. For example, what monetary compensation would a
fisherman accept to continue living along a coastline impacted by
an oil spill.
 Bias Problem

■ Collecting data from individuals using a

questionnaire method can suffer from a key
problem relating to bias. When attempting to
apply a valuation to some cost or benefit of a
project two potential biasing problems may be
encountered.
Bias in the sample
In most cases the researcher involved in the CBA will have limited
resources (time and financial). This means that a sample will have to be
chosen to collect the stated preference data on the costs/benefits
associated with a project.

However, in collecting data using only a sample of the wider population

potential bias can be found. This will be a particular problem if only a
small sample of individuals is surveyed as part of the data collection.
Bias in responses
For example, when asking individuals how much they would be
willing to pay to preserve an area of local parkland they may
apply a significantly larger monetary valuation than they would
really be willing to pay, knowing that they would not actually be
asked to pay this amount should the parkland be preserved.

Moreover, individuals may state a willingness to pay to

preserve an amenity such as a local park, even though they
actually never visit the park and may consider it a nuisance at
night when children hang around on the park.
 Revealed preference valuation
■ In contrast to 'stated' or 'expressed' preferences,
revealed preferences are not collected by asking
individuals for their opinions or views.
■ They are instead collected through direct
observation of actual responses to complement or
substitute goods.
■ This provides an indirect estimate of the value of a
cost or benefit using surrogate market goods and
commodities.
Valuing the impacts of projects using
revealed preferences can be conducted
using the following methods:
i) Market Analogy Method
■ This method of using revealed or observed preferences is associated mainly
with the provision of public goods. When a public good is provided it is often
done so either for free, or at a price lower than the true market value.
■ If this value was used in project appraisal it would not give an accurate
value to the benefits associated with the provision of such a public good.
■ To address this problem the equivalent good or service provided in the
private sector market can be used to provide a more accurate valuation of
the public good.
ii) Trade-off Method

■ One method of applying a value to a good or commodity is to use

opportunity cost:

The value of what an individual would have to give up to obtain

something – as a proxy for a good or commodity which has no
market value.

■ Two notable examples of the use of the trade-off method for

calculating value are, (1) the trade-off between time and wages to
provide a value for someone’s time, and (2) the trade-off between
risk of fatality and wages to value life.
iii) Asset Valuation Method

■ The asset valuation method uses changes in the value of assets to

estimate the benefits or costs of a project. The size of a price
increase can be used to estimate the benefit of a project, and
similarly the size of a price decrease can be used to measure the
costs of a project or negative externality.

■ This method is often used to value differences in housing.

■ For example, data can be collected on average prices of houses with

a large garden, or close access to a country park. These can be
compared against houses without those attributes, to obtain an
estimate of the value of having a large garden or local access to a
country park.
iv) Replacement Cost Method

■ This method of assigning a value to a benefit involves

observing the cost of replacing or restoring a damaged asset.

■ If the cost of replacing or restoring an asset is known, then

this can be used as a value for the benefit of not needing to
replace or restore the asset if damage to it can be avoided.

■ For example, if air pollution causes damage to a town hall

which costs £100,000 to rectify, reducing air pollution, and
therefore damage to the town hall, can be estimated to have
saved £100,000, or as such provided a net benefit for this
amount.
THANK YOU