Valuation Tools - Market Prices

Valuation at market prices can be applied for natural resources which are marked. Market price, as you know, is realized when demand for a product equals its supply. Since it is determined as a result of interaction between numerous buyers and sellers, it is considered to be a sort of equilibrium price. The advantage with market price is that it is easy to obtain and it reflects the willingness to pay of people. Thus it is quite acceptable to people as a value of the product under consideration. However, in many instances there are distortions to the market price and it does not reflect true economic value of a commodity and thus allocation of resources on the basis of market prices does not represent economic efficiency in utilization of resources. These distorting factors could be taxes imposed and subsidies provided by the government, for example, Subsidies on fertilizer reduce its price than what would have been. Thus the market price of fertilizer is less than its true economic value and induces farmers to buy more of it. A second source of distortion to market price could arise due to fixation of exchange rate, particularly for commodities traded internationally.

Many of the environmental resources do not enter the market in the sense that these are not traded at all. In such cases valuation of these resources at market prices is not possible and we have to look for alternative valuation tools. Secondly, many environmental resources are traded in the market but do not reflect true economic value of the product due to taxes and subsidies. Thirdly, property rights for natural resources in most of the cases lies with the government. But unauthorized selling of minerals, forest products, hide and horns of animals, etc. is rampant in many countries including India. In such cases the seller does not bear the cost of production of the product and therefore can afford to sell it much cheaper.