What Is Economic Value: Definition, Benefits, and Example

An economic value is a value placed on a good by an individual person and which value can be expressed, at least in principle, in terms of some willingness to pay for the good, or some compensation to forego the good. Economic value can also be the measurement of the benefit derived from a good or service to an individual, a company, or to society as a whole.

Economic value is not the same thing as market value. Market value is the price of something, such as an asset that’s determined by the supply and demand of the asset in the marketplace. While economic value is a way to understand how much something is worth to particular people or to society
as a whole.

Economists generally assume that individuals, not the government, are the best judges of what they want. Thus, the theory of economic valuation is based on individual preferences and choices. People express their preferences through the choices and tradeoffs that they make, given certain constraints, such as those on income or available time.

Measurement Of Economic Value

The economic value is measured by the most someone is willing to give up on other goods and services in order to obtain a good, service, or state of the world.

The economic value of a positive change in the natural environment is measured by what individuals are willing to pay to secure this benefit, or what they are willing to accept as compensation to forgo it. The economic value of a negative change, on the other hand, is measured by what individuals are willing to pay to avoid such a cost, or what they are willing to accept as compensation to tolerate it.

The economic value of a particular item, or good, for example, a loaf of bread, is measured by the maximum amount of other things that a person is willing to give up to have that loaf of bread. If we simplify our example “economy” so that the person only has two goods to choose from, bread and pasta, the value of a loaf of bread would be measured by the most pasta that the person is willing to give up to have one more loaf of bread.

In a market economy, dollars (or some other currency) are a universally accepted measure of economic value, because the number of dollars that a person is willing to pay for something tells how much of all other goods and services they are willing to give up to get that item.

Benefit Of Economic Value

Economic value evidence can be used to improve our understanding of how the natural environment benefits us, for example: to help set policy, management, and investment priorities. A better understanding of the economic value of the natural environment can also highlight sustainable opportunities for business.

It can be used for capturing some of the value currently ignored by the markets. For example, the economic cost of environmental pollution can be used to set the level of pollution taxes.

It can be used for economic appraisal to estimate both costs and benefits. The value evidence can also be used to make a business case for investments that will generate economic value, but not necessarily financial return.

It can be used for capturing some of the value currently ignored by the markets. For example, the economic cost of environmental pollution can be used to set the level of pollution taxes.

Example Of Economic Value

We can observe how much people spend on traveling (in terms of fuel, accommodation, food, entry fees, time, and so on) to a beautiful landscape for recreation. What they pay to travel is at least how much they value the recreational benefit, otherwise, they would not make the trip. Data collected on the number of visits and travel costs can be analyzed to estimate the demand for the recreational benefits of a site.

The property market is the best example of economic value. We can look at how property prices vary with environmental and other factors. If we have data on a sufficiently large number of transactions for properties with a wide range of characteristics, we can calculate the price premium buyers are willing to pay for living in a cleaner area, near a park, with good views, or with a garden, just as we can calculate the premium for an additional bedroom or period features.

It can also be used to estimate how much home buyers need to be compensated (through lower prices) for a disamenity such as airport noise.

Another example is that it might cost me a hundred dollars to make a bench. But that doesn’t make it any more valuable. If somebody is only willing to give me $30, then $30 is the economic value of the bench.

The Economic Value Of Resources

An environmental good or service is the sum of what all members of society would be willing to pay for it. For resources traded in markets such as oil, land, timber, and crops, the value of small quantities of market goods can be measured by their observed price. In competitive markets, prices reflect both the marginal cost of producing the good to suppliers and the marginal value to consumers.

Amenities are beneficial only to the extent that human beings value them. This does not suggest improvements in ecosystem function or other nonhuman effects of a policy have no value. Many people value open space, endangered species, and biodiversity and have shown through their memberships in environmental advocacy groups, votes in local referenda, and donations that they are willing to sacrifice much for these causes. However, the value of an environmental amenity remains what people are willing to sacrifice for that amenity.

Goods that are not traded, values depend on the people affected. For example, the damage from air pollution in one country versus another will depend on the income of the country. People in a poor country have many critical pressures on their scarce resources and so maybe unwilling to expend too many resources fighting this single risk. They may place a lower value on air pollution abatement than people in richer countries

Economic Value Vary

Individuals

People have different values for the same thing – just as they react differently to prices. Because they have different rights, responsibilities, needs, wants, cultural and individual tastes and habits, knowledge, and experiences that influence their relationship with the natural environment. They also have different incomes that influence their willingness to pay more than their willingness to accept compensation.

The condition and location

Different resources are expected to have different values. But what applies in all cases is that a resource is valued less when it is in a poor condition – because it cannot provide all the services it is capable of providing.

Location is particularly important for use-values. Easy access may mean higher values for some resources (like an inner-city park) but this does not necessarily mean that inaccessible resources are less valuable – it depends on the resource, its uses, and types of value.

Scarcity and substitutability

Resources have different values depending on whether there are any available substitutes: the more scarce a resource (less substitutes) the higher its value.

The direction, scale, and timing

Individuals tend to value negative changes more highly than the equivalent amount of positive changes. This is observed in many other fields and is explained by psychology as ‘loss aversion. In terms of scale: the greater the change, the greater its value. In terms of time, changes today are valued more highly than changes next
a year and so on.

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