Option value (cost–benefit analysis)

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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 option value definition finance 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. 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 habitats[1] wilderness areas[2] and water recreation resources. The term "option value" and its theoretical underpinnings as a non-user benefit were initially developed option value definition finance by Burton Weisbrod. That was followed by an active academic debate about the concept, and refinement of its measurement.

Some economists further developed its option value definition finance from consumer surplus and role as an uncertainty option value definition finance aversion premium, [12] [13] leading to the suggestion that a concept of "option price" may be more appropriate.

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 [19]. From Wikipedia, the free encyclopedia. For use in finance, see Option time value. Valuing Price Changes Under Uncertainty. Symposium on Option value definition finance Economics of Exhaustible Resources, pp.

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