Environmental and Service Quality Valuation At A Glance

Capabilities and Services

Economic values of many goods and services are well approximated by their market prices. However, in some cases (e.g., for hypothetical new products), there is no observed price. In other cases the observed price will differ substantially from the economic value of the service. This will often be true in the case of environmental services, and of utility services where networks limit the scope for consumer choices about important service reliability and quality attributes. Nonetheless, the economic values of improvements or declines in these services or attributes are often critical inputs to decisions about projects or policy change. Policy makers require these economic values to know whether the benefits of a policy change outweigh its costs. Water companies and their regulators require economic values to evaluate service improvements, and to compare alternative delivery schemes, (e.g., for maintaining security of supply via resource development, or via leakage reduction, or via demand management schemes). Other utility companies have similar needs.

Economists have developed a range of techniques to estimate the economic values of improvements or declines in these "non-market" situations where observed prices are insufficient. The techniques involve either direct elicitation of preferences (e.g., contingent valuation and choice experiment methods), or indirect derivation of values from revealed behavior in other markets (e.g., travel cost and hedonic price approaches). Also, sometimes values for a specific project or policy proposal may be derived using the "benefits transfer" technique, drawing on previous valuation results from elsewhere.

NERA economists have applied these techniques to derive economic values for many different attributes of services or products, including deriving values for hypothetical new telephone services, models of car, improvements to utility customer service levels, and improvements to the environment. The studies have included application of contingent valuation, choice experiments, revealed preference, and benefits transfer methodologies, in order to assess customer or community willingness to pay for improved service and quality standards, and to estimate the aggregate net benefit of the change.