View source for Option value (cost–benefit analysis)

{{for|use in finance|Option time value}}
In [[cost–benefit analysis]] and [[social welfare]] economics, the term '''option value''' refers to the value that is placed on private [[willingness to pay]] for maintaining or preserving a public asset or service even if there is little or no likelihood of the individual actually ever using it.  The concept is most commonly used in [[public policy]] assessment to justify continuing investment in parks, wildlife refuges and land conservation, as well as rail transportation facilities and services.  It is also recognized as an element of the [[total economic value]] of environmental resources.
This concept of "option value" in cost–benefit analysis is different from the concept used in finance, where the term refers to the valuation of a financial instrument that provides for a future purchase of an asset.  (See [[Option time value]].)  However, the two can be related insofar as both can be interpreted as a valuation of risk factors.<ref>{{cite web |url=https://conceptually.org/concepts/option-value |title=Option Value - Definition and examples |publisher=Conceptually |access-date=21 September 2023}}</ref>
==Application==
In the environmental research literature, option value is commonly interpreted as the value of preserving threatened [[natural resources]] so that they might be available for use in the future.  It has been applied for establishing the value of preserving [[wildlife habitat]]s,<ref>Brookshire, D.S., L.S. Eubanks and R.A. Randall, 1983. "Estimating Option Prices and Existence Values in Wildlife Resources," Land Economics, 69: 1-15</ref>  [[wilderness area]]s,<ref>Walsh, R.G., J.B. Loomis and R.A. Gillan, 1984. "Valuing Option, Existence and Bequest Demands for Wilderness," Land Economics, 60: 14-29</ref>  and water recreation resources.<ref>Greenley, D.A., R.G. Walsh and R.A.Young, 1981. "Empirical Evidence from A Case of Recreation and Water Quality," Quarterly Journal of Economics, 96 (4): 657-573</ref>   In the transportation research literature, option value is most commonly interpreted as estimated the value that non-users are willing to pay to ensure continued availability of a [[rail transport]] facility and its service (as an option that will be available in the future).<ref>Roson, R. 2000. "Social Cost Pricing when Public Transport is an Option Value," Innovation 13 (1): 81-94.</ref>   It is recognized as a type of benefit to be considered in cost benefit evaluation of transportation investment alternatives by the UK [[Department for Transport]]<ref>Department for Transport, England.  2004. Transport Analysis Guidance</ref>  and the [[Scottish Government]],<ref>Scottish Government, 2009, Review of Economic Assessment in Rural Transport Appraisal</ref>  and has also been used for assessment of regional rail projects in the [[Netherlands]].<ref>Geurs,  K., R. Haaijer, and B. Van Wee.  2006. "Option Value of Public Transport: Methodology for Measurement and Case Study for Regional Rail Links in the Netherlands," Transport Reviews, 26 (5):613-643</ref>  In the US, option value is recognized in several transportation [[benefit-cost analysis]] guides, including those of the [[Transportation Research Board]]'s Committee on Transportation Economics,<ref>TRB Economics Committee, 2010, Transportation Benefit-Cost Analysis, Equity and Option Value Benefits, web guide. http://bca.transportationeconomics.org/benefits/equity-benefits</ref>  the Transit Cooperative Research Program,<ref>EcoNorthwest and Parsons Brinckerhoff, 2002. Estimating the Benefits and Costs of Public Transit Projects: A Guidebook for Practitioners, Transit Cooperative Research Program, Report 78, Transportation Research Board, Washington, DC</ref>  and the [[Victoria Transport Policy Institute]].<ref>Victoria Transport Policy Institute, 2009. Transportation Cost and Benefit Analysis II, Ch.5.9: Transportation Diversity</ref>
==Evolution==
The term "option value" and its theoretical underpinnings as a non-user benefit were initially developed in 1964 by [[Burton Weisbrod]].<ref>Weisbrod, Burton.  1964. "Collective Consumption Services of Individual Consumption Goods," Quarterly Journal of Economics, 78 (3):471-477</ref>  It was posited as an element of benefit distinct from the traditional concept of [[consumer surplus]], and it depended on three factors: (1) [[uncertainty]] about future need for the asset, (2) [[irreversibility]] or high cost of replacement if the asset is lost, and (3) non-storability of the asset.  That was followed by an active academic debate about the concept, and refinement of its measurement.  Some economists further developed its distinction from [[consumer surplus]] and role as an [[uncertainty]] [[risk aversion]] premium,<ref>Cicchetti, Charles J. and Freeman, A. Myrick, III. 1971. "Option Demand and Consumer Surplus: Further Comment.1," Quarterly Journal of Economics, 85 (Aug): 528-539.</ref><ref>Schmalensee, Richard. 1972. "Option Demand and Consumer's Surplus: Valuing Price Changes Under Uncertainty." American Economic Review, 62(Dec): 813-824</ref>  leading to the suggestion that a concept of "option price" may be more appropriate.<ref>Freeman, A.M., 1985. "Supply Uncertainty, Option Price and Option Value,"  Land Economics, 6, 176-181.</ref>   Others stressed the [[irreversibility]] aspect of the resource and further specified the framework for valuing avoidance of that risk,<ref>Arrow, Kenneth J., and Fisher, Anthony C. 1974. "Environmental Preservation, Uncertainty, and Irreversibility," Quarterly Journal of Economics, 88(May): 312-319.</ref><ref>Fisher, Anthony C. and [[John V. Krutilla|Krutilla, John V.]] 1974. "Valuing Long Run Ecological Consequences and Irreversibilities," Journal of Environmental Economics and Management, 1: 96-108</ref><ref>Fisher, Anthony C. and Peterson, F.M. 1976. "The Environment and Economics: A Survey." Journal of Economic Literature, 14(March): 1-33</ref><ref>Henry, Claude. 1974. "Option-Values in the Economics of Irreplaceable Assets," Review of Economic Studies: Symposium on The Economics of Exhaustible Resources, pp.89-104.</ref> with suggestions to adopt a concept of "quasi option value" or "irreversibility effect."  All of these terms and concepts appear in academic literature.  However, the original term "option value" is still commonly used in applied studies (as apparent in works cited in the preceding application section; see also<ref>see Johansson, Per-Olov, 1987. The Economic Theory and Measurement of Environmental Benefits, Cambridge Press</ref>).
==See also==
* [[Cost–benefit analysis]]
* [[Non-use value]]
* [[Total economic value]]
== References ==
{{Reflist}}
{{DEFAULTSORT:Option value (cost-benefit analysis)}}
<!--- Categories --->
[[Category:Welfare economics]]