DEFINITION: In economics, the “valuation” of a thing is its estimated market value, as understood by the subjective theory of value.
In the realms of real estate and expensive equipment, the valuation of a piece of property is often called “an appraisal.”
ETYMOLOGY: The word “valuation” derives, via Middle English, from the Middle French word valuer, “to value” or “to evaluate.”
USAGE: Since the middle of the nineteenth century, nearly all economists (apart from Marxists) have been in agreement that the value of a scarce good on the open market is determined mainly by the preferences of consumers.
For most purposes, economists believe it is far better to allow the market to set the price of a thing than it is to set a price in ignorance of the market price.
However, for some purposes it is simply not possible to wait to see what the market price of a commodity will turn out to be. Therefore, some sort of provisional best-guess estimate must be made based on whatever information is available.
The types of situations in which valuations are necessary have to do mainly with the legally required periodic specification of the value of some form of property—notably, real estate—for some government purpose.
One of the best-known examples of such periodic valuations is the appraisal of real estate.
This form of valuation must often be performed on a regular basis (usually, every so many years) for the purpose of estimating a property owner’s tax liability.
This, in turn, may be necessary so that the taxing authority is able to prepare a bill or statement to be sent to the property owner in a timely manner, or in accordance with a regular schedule.