Types of Benefit Estimation
There are five primary categories of benefit estimation, organized by their methodological approach to quantifying the value of a project or investment.
Main Categories
- Cost-Benefit Analysis — a method that compares the monetary costs of a project to its monetary benefits, as seen in the London Olympics infrastructure development, which was evaluated using cost-benefit analysis to determine its potential return on investment.
- Contingent Valuation — a technique used to estimate the value of non-market goods and services by asking people how much they would be willing to pay for them, exemplified by the Exxon Valdez oil spill damage assessment, where contingent valuation was used to estimate the value of lost recreational activities.
- Hedonic Pricing — a method that estimates the value of a good or service based on the prices of similar goods or services, as illustrated by the IBM real estate valuation, where hedonic pricing was used to estimate the value of office buildings based on their characteristics.
- Travel Cost Method — a technique used to estimate the value of recreational sites by analyzing the costs that people incur to visit them, demonstrated by the Yellowstone National Park visitor study, where the travel cost method was used to estimate the value of the park's recreational activities.
- Benefit Transfer — a method that involves transferring existing estimates of benefits from one study to another, similar context, as seen in the US Environmental Protection Agency's use of benefit transfer to estimate the benefits of reducing air pollution in different regions.
Comparison Table
| Category | Cost | Scale | Speed |
|---|---|---|---|
| Cost-Benefit Analysis | High | Large-scale | Slow |
| Contingent Valuation | Medium | Small-scale | Medium |
| Hedonic Pricing | Low | Medium-scale | Fast |
| Travel Cost Method | Low | Small-scale | Medium |
| Benefit Transfer | Low | Large-scale | Fast |
How They Relate
The categories of benefit estimation often overlap or feed into each other, and can be commonly confused. For example, Cost-Benefit Analysis and Contingent Valuation are both used to estimate the value of non-market goods and services, but the former is more comprehensive and includes both market and non-market benefits, while the latter focuses specifically on non-market benefits. Hedonic Pricing and Travel Cost Method are both used to estimate the value of environmental goods and services, but the former is based on market prices, while the latter is based on the costs that people incur to visit a site. Benefit Transfer is often used in conjunction with other categories, such as Cost-Benefit Analysis, to estimate the benefits of a project or policy. Additionally, Ricardo's comparative advantage model (1817) can be applied to benefit estimation to determine the optimal allocation of resources.