A Start on nonmarket valuation:Valuation and Consumer’s Surplus, put simplyA start on non-market valuation: Edward Morey October 11, 2010 A Start on nonmarket valuation: Nonmarket-introduction.doc October 11, 2010 Valuation and Consumer’s Surplus, put simply I use the term individual, to mean an individual member of some species, as in George Bush is an individual, and George the Gorilla is an individual. (Economists are typically only interested in individuals that belong to the species homo-sapiens, but that need not be the case.) For economists, value is anchored at the level of the individual: an individual associates different values with different things. It is a measure of “worth” that an individual attaches to a commodity, activity, or state of the world.1 Put simply, if commodity A is valued more highly than commodity B, having A increases happiness more than having B would increase happiness. (Often we use the word utility as a substitute for happiness.) Values, from the individual’s perspective, are relative. As in, “I value my friendship with Marc more than I value my friendship with Don.” Or “I would give up three apples to remain friends with Marc but only two apples to remain friends with Don.” For economists, the values an individual associates with different commodities are expressions of that individual’s preferences. 2 For economists, the value society places on a commodity is the sum of the values (positive and negative) placed on it by the individuals in that society. (For economists, if the individual members of society do not value a commodity, the commodity has no social value.) An important question then is which individuals count: whose values count. Economists typically limit counting individuals to humans, but there is nothing in economics that requires this. Note that many environmentalists, and some economists, believe that the 1 Note the word “attach”. A red ball only has value because one or more individuals have attached value to it. Otherwise it would be without value. 2 A person is an individual, my dog Sofie is an individual, a worm is an individual, and my house plant, Wilbur, is an individual, a distinct member of his species. An economist would probably say that an individual who has no preferences cannot value things: for such an individual, there are no values, nothing to count. To have preferences the ability to experience pain would be a minimum requirement.A start on non-market valuation: Edward Morey October 11, 2010 preferences/values of non-human individuals (or at least some of them) should count towards social value. (Who should and should not count is an equity question.)3 Note that many people define value differently from how economists define value. For example, many environmentalists would argue that the earth has value independent of how individual humans value it. Religious people would tell us that values are determined by the preferences of God, not the preferences of men. Philosophers talk about whether things can have intrinsic value: value not assessed by some valuer—built in value.4 3 Note the distinction between (A) Edward the individual is a member of society whose values count directly in the social adding-up. Edward has a dog Sofie that whose happiness he cares about greatly. But, Sofie is not a member of society, so her values do not count directly in the social adding-up. And (B), Both Edward and Sofie are members of society, so both their preferences count directly in the social adding- up. Sofie’s welfare gets weight in both worlds, but in A) her preferences do not directly count; they count only because a member of society cares about her. 4 Its value “for its own sake”, or “in its own right.” As in, a tree has value for its own sake, not simply because individuals, who count, use it for shade or cut it down to help build a house. Tanya, a student, asked me "can intrinsic values be factored into economic analysis!" Good question. The more general question is whether intrinsic value can be incorporated into decision making--letting things have intrinsic value would, it seems, set economics on its head. How might it work? There would be two kinds of values: economic values, based on the preferences of individuals, and intrinsic values. The decision maker would want to add them together. This would require that they are all in the same units, probably dollars. I am comfortable with measuring people values in dollars because people have use for dollars, but less comfortable saying that a tree has an intrinsic value of $10? What would the tree do with $10? Nothing, but does that matter? Who would assign the intrinsic value? I guess an economist would say that to justify, on efficiency grounds, cutting down a tree, the net benefits, to humans, of cutting down the tree must be greater than the intrinsic value of the tree standing.A start on non-market valuation: Edward Morey October 11, 2010 Economists typically value things in money. • Could choose some other unit of value (ducks? in “Ducks we Trust”) • Important thing is to value everything in the same units The concept of value that economists typically use is called consumer’s surplus. I will define it in a moment. Before I do, I need to make a distinction between market and nonmarket commodities. • Market commodities are commodities that are bought and sold in the market place. Each individual takes the price of the commodity as given and chooses the quantity to purchase. • Price is exogenous, quantity is endogenous. All the stuff available for purchase in the market place Most market commodities are congestible – what does that mean? Write down the names of five things that are market commodities, and explain why they are market commodities.A start on non-market valuation: Edward Morey October 11, 2010 • Nonmarket commodities are commodities that are provided in some fixed quantity at a zero marginal cost to the individual(s) consuming it. Examples include public goods, historical monuments, snow in the mountains, the weather, air-quality, how fat or skinny is George, etc. What is a public good? Nonmarket commodities might, or might not be, congestible. For example, national defense is a nonmarket commodity and a public good, so not congestible. But a common-property fishery is also a non-market commodity, and it is congestible.