Kokomo Tribune; Kokomo, Indiana

Opinion

April 13, 2014

MICHAEL HICKS: Finding measure of value

One aspect of economic research I think is especially powerful is the ability to measure or monetize the things humans clearly value but for which a market price is not necessarily apparent. This is one of the aspects of economic analysis that gives it such dominance over other social sciences.

To begin, we must first accept that the price of a good that is bought or sold reflects some measure of value. So, if someone crashes into my car, we all accept the value of the car to me can be measured by the price of a replacement. We might not agree on just exactly which replacement is appropriate, but like C.S. Lewis describing fair play, the fact the insurance company and I are arguing about the appropriate replacement price necessarily admits a replacement price is an appropriate measure of value.

The problem is that many things we value are not bought and sold, and so have no visible price. On most occasions this does not matter, but when we are confronted with policy decisions about scarce resources, the absence of a value measure increases our risk of making bad choices. ­Environmental issues are most commonly associated with this issue, and economists have two tools for measuring value. The first of these is the performance of psychology-like experiments or surveys. These studies have shown great promise but are very costly to perform.

The second method of assigning value is to observe the price of an item consumed along with the good in question. Take for example two identical houses in every respect, except that one is nestled in a quiet neighborhood, while the other at the end of a busy airport runway. The price difference between these two homes is a good approximation of the value of quiet or the disamenity value of noise.

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