Talk is cheap: the existence value fallacy.

• Jurisdiction: United States
• Date: 22 December 1999
• Author: Boudreaux, Donald J.

1. INTRODUCTION

   Talk is cheap. We distinguish between those who merely "talk the talk" and those who actually "walk the walk." We hear admonitions to "put your money where your mouth is" Usually economists are the first ones in line to inform people that the only thing that matters is what they are actually willing to pay, not what they say they are willing to pay. Action, not words, is the touchstone of economics.

   But this common-sense and economists' rule of using real money to back expressed opinions has been ignored by many economists who, through the notion of "contingent value," have elevated people's words above their deeds. The idea has spread like wildfire, finding adherents among lawyers, politicians, economists, and environmentalists who have advocated the use of this notion as a guide to environmental policy. Rather than recognizing these free-floating opinions as loose talk, advocates have dressed them in the garb of economic science and dubbed it to be "contingent value": what you say you would pay if you actually had to and knew whom to pay.(1)

   The most improbable version of contingent valuation that has found its way into environmental law and policy is the attempted measurement of so-called "existence value" or "nonuse value." Existence value is the value--or the subjective utility--that people experience from just knowing about the existence of certain environmental amenities.(2) Using the well-developed economic concept of externalities, environmentalists and many economists increasingly argue that command and control regulation by government is necessary to protect existence values.(3) In the same way that efficiency demands that the law force upstream factories to reduce the number of pollutants they dump into rivers whose waters are used by downstream residents, existence value advocates argue that the law must force property owners to decrease the amount of change they inflict on their properties (the unsullied existence of which adds to the subjective utility of nonowners).(4)

   We argue that existence value measurements are unavoidably spurious. We further argue that, while existence values are real, attempts to protect them legally are wholly misguided. Government regulations that spring from existence value analyses only appear to be scientifically grounded. In fact, so-called "contingent value" is so riddled with conceptual problems that it simply cannot be recognized as an expression of individuals' true valuations, nor can it be used as a reliable guide to political decision making. The law had best ignore such values, relying instead on the marketplace to protect them as far as they can be protected.(5)

2. UNDERSTANDING EXISTENCE VALUE

   1. What is Existence Value?

      If property rights are fully specified, enforced, and freely exchangeable at zero transaction costs, economic theory is clear that available resources will be used as efficiently as possible to satisfy human wants, which are expressed as demands for goods and services.(6) But reality is never as neat as blackboard economics.(7) Many would-be property rights are inadequately specified or poorly enforced.(8) And even when specification and enforcement of property rights are adequate, the costs of transacting to transfer ownership from lower-valued to higher-valued uses are often excessive.(9) When transaction costs are excessive, property rights do not always find their way to their most highly valued uses.(10)

      Problems engendered by inadequately specified or enforced property rights, or by high transaction costs, are the typical justifications for active government regulation.(11) Few people today dispute that well-functioning markets outperform government regulators. But support for such regulation is much more widespread in those settings in which utility-maximizing individual decisions impose costs involuntarily upon others. In short, showing that a particular institutional setting is marred by an externality is the quickest way to cultivate the support--even of economists--for active government regulation.(12)

      As a means to address the externalities problem, the notion of existence value has recently come into play in economic and legal literature and now in the law itself. We use the term existence value to include other terms that are frequently used in reference to the "nonuse" value of natural resources (the "use value" of resources being market values based on human value in exchange).(13) Market prices may not include "intrinsic values." Markets might ignore the fact that "natural resources may have value independent of humans, based on their status as natural creatures or objects."(14) Existence (or nonuse) value is generally agreed to mean the value of unused resources, such as their preservation for future generations.(15)

      Existence values are a real psychological phenomenon. These values are the pleasure we take from knowing that certain things exist. Individually we have little influence over most of existence. We suffer a loss if certain things cease to exist, yet can do little to prevent the loss from occurring. Most of us obtain psychic utility from the existence of our grandmothers and suffer a real loss from their deaths. That is, each of us ascribes existence value to our grandmothers, but there is not much of a market for grandmothers that allows us to transact for grandmotherly services.

      More specific to our discussion is the existence value of environmental amenities.(16) We have not visited the Costa Rican rain forest, but know that it exists, get pleasure from thinking about it, and would like to visit it some day. We get a benefit--a positive externality--from something we know to exist, even though we do not pay to maintain the rain forest. We would suffer a utility loss if we learned that a developer clear-cut all the trees and left a moonscape. Wallace Stegner articulates this sentiment in his "Wilderness Letter," writing, "What I want to speak for is not so much the wilderness uses, valuable as those are, but the wilderness idea, which is a resource in itself."(17)

      What should be done about existence value? Over the past several decades, some economists have asserted that existence value poses another example of an externality that must be dealt with by public intervention.(18) For example, the existence value that many of us have for the rain forest should be measured and included in any calculation of its full value. Only if the aggregate value that people attach to goods and services produced by clear-cutting the rain forest exceeds the full value of the intact rain forest--including its existence value--is it economically justified to clear-cut the rain forest. But because market prices seldom account for the existence values of forest lands, private owners of these lands respond to these inaccurate market signals by destroying them when, in fact, these forests should be kept undisturbed.

   2. Mimic the Market

      Goods bought and sold privately and individually are properly left to markets because private goods, such as a pair of shoes, are typically only enjoyed by the person who acquired them. Because those who do not pay for private goods can easily be excluded from enjoying these goods, the market can be trusted to produce the optimal amount of private goods. As economists say, it is impossible to "free ride" on private goods. Each buyer of private goods, therefore, accurately reveals his valuation for such goods when he purchases them.

      Matters are different for public goods. Public goods, when provided for an individual, bestow their benefits onto several others regardless of whether or not those others paid to enjoy these goods.(19) If goods are truly public, then people want them to be provided, but the market will tend to undersupply these goods because each potential beneficiary of the goods will try to free ride off of the efforts of others.(20) Government may have to assume responsibility for providing public goods.

      For precisely the same reason that the market will not adequately supply public goods, the government does not know how much, if any, public goods it should supply The reason is that there is no reliable mechanism to reveal the true demand for public goods. In response to this challenging problem, economists have long worked to devise mechanisms that uncover people's true valuations of public goods not traded in the market.(21) None of the methods of revealing such valuations are without their shortcomings.(22)

      While the problem of demand revelation for public goods, such as national defense, is not new this issue has arisen anew in the guise of existence value and its supposed solution, the contingent valuation method (CVM).(23) Contingent valuation is advertised as a way to get people to reveal their true monetary values for things such as environmental amenities.(24) As a proponent notes, "maintaining populations of native fish in an estuary, or protecting visibility at national parks are not themselves goods that are bought and sold ill a market. Yet, placing a monetary value on them can be essential for sound policy."(25) Public officials can make better judgments about how much environmental protection citizens want--and, therefore, should be produced--if citizens can reveal preferences that presumably cannot be expressed through the market.(26)

      We say that we value the Costa Rican rain forest, but talk is cheap; let's find out what happens when we must put up our money. Genuine economic value requires that people expressing values must bear the monetary consequences of their expressions. A key challenge for a contingent valuation--namely, asking people hypothetical questions about their valuations--is getting people to be truthful.

      The best contingent valuation surveys sample a sufficiently large group of people to overcome statistical accuracy problems.(27) The best of these surveys are done face-to-face, provide certain background information and...