Option value: An exposition and extension

Abstract

Option value is an economic concept that refers to the value individuals place on the option to use or benefit from a good or service in the future, even if they do not currently intend to use it. This concept was popularized by an influential article by Richard C. Bishop, who argued that under certain assumptions, option value can be positive, negative, or zero for a risk-averse individual. This conclusion is important because it challenges the notion that consumer surplus alone is an adequate measure of the total benefits of a good or service, as option value may introduce a risk premium. However, the sign of option value can be indeterminate, making it difficult to measure empirically. Despite these challenges, the concept of option value has been influential in environmental and resource economics, particularly in cases where there is uncertainty about future demand or supply. – AI-generated abstract.