Review of last lecture

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Review of last lecture

• Hedonic pricing
• Valuation of environmental amenities associated
  with property values
• Effect of landfill sites on house values
• Health risks morbidity and mortality
• Market assumptions of hedonic pricing
• Travel cost
• Overview of travel cost
• Practical considerations and limitations

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Choice modelling Tim Capon
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Lecture outline

• Choice modelling
• Comparison of alternative nonmarket valuation
  techniques
• Application of nonmarket valuation in developing
  countries

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Overview of choice modeling

• Conjoint analysis (CA)
• A number of indirect hypothetical methods, widely
  used by market researchers in the evaluation of
  new products and markets
• Based on the premise that commodities can be
  viewed as bundles of various attributes (as with
  hedonics)

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Overview of choice modelling

• Respondents rank or rate a series of these
  bundles in which some or all of the different
  attributes are allowed to vary.
• From these rankings or ratings, marginal rates of
  substitution between the different attributes can
  be estimated.
• By including price as one of these attributes,
  these marginal rates of substitution can be
  translated into WTP for changes in the levels of
  each attribute.

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Choice modelling

• Four stages
• Identification of key attributes relevant to the
  choices of interest
• Selection of scenarios (alternatives) that will
  be used in the survey
• Actual survey
• Modelling and analysis

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Attribute key
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Attribute levels
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Four different types of format

• Dichotomous or contingent choice
• Contingent ranking
• Contingent rating
• Graded pair or pairwise rating

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Dichotomous or contingent choice

• Respondents are asked to choose their most
  preferred alternative from two or more choices
  with different levels of attributes
• Dichotomous choice contingent valuation (Are you
  willing to pay or not?) is essentially a
  special case of dichotomous choice CA, where the
  study is limited to two alternatives the status
  quo and a price with a given level of
  environmental quality.

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Dichotomous or contingent choice

• Relaxing these restrictions allows CA to
  emphasize tradeoffs among hypothetical
  alternatives over the purchase of an
  environmental amenity.
• Some argue this change in emphasis deflects
  emotional stress, and as a result, is less likely
  to generate protest or symbolic responses.
• Dichotomous choice CA has been used to estimate
  WTP to preserve different kinds of undeveloped
  land, to take recreational fishing trips,
  preferences for locating landfills, and for
  reducing health risks.

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Contingent ranking and rating

• Contingent ranking asks respondents to rank a set
  of hypothetical alternatives from most
  preferred to least preferred.
• Used to evaluate the demand for electric cars,
  WTP for improved visibility at national parks,
  and WTP for improved water quality
• Contingent rating asks respondents to supply
  information about how much they prefer one bundle
  to another.
• Used to estimate WTP for different attributes of
  salmon fishing and waterfowl hunting

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Graded pair or pairwise rating

• Respondents are shown two alternatives and are
  asked to show their preference for one of the
  products by choosing a number within a set of
  numbers.
• For example, respondents might be asked to choose
  from 1 to 7, where 1 represents the strongest
  possible preference for one good and 7 the
  strongest preference for the other good.
• The exercise is then repeated with different
  hypothetical alternatives.

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Advantages of choice modelling over contingent
valuation

• Respondents are not required to monetize
  environmental goods or services explicitly.
• Respondents are generally more comfortable
  providing qualitative rankings or ratings of
  attribute bundles, which include prices, rather
  than dollar valuations of the same bundles
  without prices.

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Advantages of choice modelling over contingent
valuation

• CA focuses on marginal tradeoffs between
  attributes rather than asking respondents to
  state a maximum WTP.
• CA allows a more detailed evaluation of the
  alternatives.
• Like dichotomous choice CV (referendum format
  question) CA is believed to present a more
  realistic, familiar setting for respondents.

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Advantages of choice modelling over contingent
valuation

• Some researchers believe that the ability to
  accurately answer hypothetical questions about
  unfamiliar goods improves with reflection or
  examination of preferences.

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Advantages of choice modelling over contingent
valuation

• Responding to a survey can be viewed as a dynamic
  learning process.
• The greater number of elicited responses in CA
  may allow more room for learning to occur.
• Potential tradeoff with people getting tired of
  answering more questions.

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A technical problem

• A problem with all CA methods and the referendum
  versions of CV.
• Because respondents do not directly give a WTP
  estimate for themselves there is an intermediate
  inferential stage in the benefit estimation
  process.

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A technical problem

• This intermediate stage takes the yes/no, ranking
  or rating information from the survey, embeds it
  in an assumed structure of preferences and uses
  statistics to tease out the desired WTP answer.
• The problem is that the final answer is quite
  sensitive to the choices made at each step of
  this process.

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Would you be willing to pay for an
environmental change?
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Percentage of respondents WTP each amount

• If the Wi above are ordered so that
• W1 lt W2 lt . . . lt WM
• then we expect
• P1 gt P2 gt . . . gt PM
• subject to random response error and the
  systematic influence of such independent
  variables as income, education, and pre-existing
  environmental position.

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Statistical inference

• The analyst faced with this data can choose from
  roughly a dozen methods for inferring the
  relationship between the probability of the
  respondent accepting the bid presented to her
  or him and the size of that bid.
• The resulting relationship implies a mean WTP for
  the project or policy being asked about.
• Then to complete the benefit side of the
  cost-benefit analysis, the inferred mean WTPs are
  multiplied by the number of individuals assumed
  to be fairly characterized by that number.

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Sewers and wastewater treatment

• A project to improve water quality being
  considered for a Latin American country by one of
  the multinational lending agencies.
• The aim of the project is to improve ambient
  water quality in a river flowing through a major
  industrial city.
• The river regularly has periods of zero dissolved
  oxygen, with attendant problems of noxious smells
  over reaches within the city.

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Sewers and wastewater treatment

• Much longer reaches of the river that have no
  recreational value at any time due to poor water
  quality.
• Smell, turbidity, lack of aquatic life, and
  generally disgusting appearance
• The WTP figures were sought by describing the
  project and its predicted effects on the rivers
  quality and then asking the respondent if he or
  she would be willing to pay an amount W1 that
  varied across the sample of people interviewed.

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Per-household WTP for the project
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Choice of method

• The choice of method is not a matter of chance.
• The analyst could choose a method of inference
  that would be most likely to give a high mean WTP
  estimate.
• Conventional CVM may involve responses to direct
  questions about WTP and problems such as
  protests, ignorance and confusion but the
  responses once obtained do not have to be
  econometrically massaged.

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Blamey et al. (2000)

• Valuing remnant vegetation in Central Queensland
  using choice modelling.
• In the Desert Uplands region of Central
  Queensland, many pastoralists are clearing
  vegetation in order to improve cattle grazing
  production.
• A choice modelling study was undertaken to
  provide estimates of the benefits of retaining
  remnant vegetation that are appropriate for
  including in a cost benefit analysis of tighter
  clearing restrictions.

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GM food

• The results of the choice modelling analysis
  suggest that consumers require a discount on
  their weekly food bill before they will purchase
  GM food.
• Gene technology using animal and plant genes was
  found to be more objectionable to respondents
  than that using plant genes alone, especially
  among women.
• Age seems to accept preferences for a certain
  type of food, with older people generally more
  accepting of the use of gene technology.

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CV versus conjoint analysis

• Stevens et al. (2000) found that when conjoint
  and CV questions differed only in rating and
  pricing format, respectively, WTP estimates were
  quite different.
• Since most conjoint models essentially count
  maybe responses to valuation questions as yes
  responses, we conclude that conjoint model
  results often produce WTP estimates that are
  biased upwards.

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Direct vs indirect techniques

• Indirect methods do not match the problem
  settings that need to be addressed.
• Even if you try to combine the values from
  multiple indirect techniques underlapping and
  overlapping are unavoidable and not correctable
  even when only use benefits or damages are
  sought.
• Nonuse damages or benefits are both real and
  ethically important, though where to draw the
  line around relevant nonusers will remain an
  enormously difficult question in any real
  situation.

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What about the problems of direct questioning
methods?

• Problems such as the hypothetical nature of these
  studies and the limited knowledge and calculating
  abilities of respondents.
• To answer these difficulties we need to know how
  much to inform respondents about unfamiliar
  problems before asking them questions.
• Many of the biggest valuation challenges of the
  future are likely to involve problems where
  multiple dimensions can change more or less
  independently.

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Developing countries

• Developed countries OECD countries
• Organization for Economic Cooperation and
  Development
• Developing countries
• Any small selection from the roughly 125 to 150
  nations that might be called developing would
  fail to do justice to some dimensions of the vast
  range of physical and economic settings
  represented.
• Typical country can be pictured as toward the
  poorer end of the income scale and as lying in
  the tropics with a large proportion of its
  citizens in subsistence agriculture

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Nonmarket valuation in developing countries

• Useful case study of nonmarket valuation
• Cost-benefit analyses conducted as part of
  development projects by international agencies
  such as the World Bank.
• For example, the Interamerican Development Bank
  requires that all loan proposals include
  cost-benefit analyses.
• E.g. wastewater treatment plant environmental
  benefits?
• E.g. road or a dam side effects on the
  environment?

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Nonmarket valuation in developing countries

• Developing countries have lower incomes, less
  recreation time, less access to transportation,
  poorer health status, more people in agriculture
  and a relatively greater role for resource
  extraction.
• These differences imply that there may be
  corresponding differences in the relative
  importance of specific sources of (or routes to)
  benefits or damages.

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Types of environment problem

• The type of environmental problems poor people in
  developing countries face has consequences for
  the type of nonmarket valuation methods that are
  appropriate.
• Differences exist between the relationship to the
  environment between the rural and urban poor.

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Rural poor

• the destitute are those who have very few
  assets, are marginalized, and who are continually
  forced to live from hand to mouth. They have no
  recourse but to exploit the environment around
  them, even if it means degrading its long-term
  value for their needs (UNDP 1999 27).
• Heavily dependent on natural resources for their
  livelihoods.

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Rural poor

• The pressure from population growth is expressed
  in territorial expansions or migration to an
  urban area.
• The essential message here is that attacking
  poverty in rural areas is then necessarily a
  matter of improving poor peoples ability to
  derive sustenance and income from more productive
  sustainably-managed natural resources (UNDP
  1999 28).

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Urban poor

• The urban poor live in densely populated regions
  often characterized by substandard housing,
  inadequate or polluted water, lack of sanitation
  and sold-waste systems, outdoor air pollution,
  and indoor air pollution from low-quality cooking
  fuels.
• Under such living conditions, health risks are
  heightened because of the concentration of people
  and production.

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Urban poor

• Many of the linkages between the urban poor and
  the environment occur in the form of the effects
  of the environment on them.
• Urban growth often encroaches on farmland,
  destroys wildlife habitats, and threatens
  sensitive ecosystems and inshore fisheries.
• Improving the environment in urban areas can
  reduce poverty because it improves poor peoples
  health.

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The value of natural resources in developing
countries

• Probably the most important factor contributing
  to natural resource price distortion in
  developing countries is market failure.
• Market prices in these regions do not take
  account of externalities.
• For example, when lumber is exported from a
  country in SE Asia to Japan or France, the
  importing country will pay the prevailing market
  price, which is highly unlikely to include the
  environmental effects of the logging and the
  foregone benefits (use and nonuse values)

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Benefit estimation for the developing country
setting

• Indirect or revealed preference connect the
  environmental benefit or damage to the market
  setting, find the necessary data and manipulate
  it in ways consistent with consumer theory and
  its own structure so the output is convincing.
• Direct or stated preference ask hypothetical
  questions more or less directly about the
  environmental project, policy, or action of
  interest.

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Hedonic pricing

• Based on the premise that a good or service can
  be defined as a bundle of characteristics or
  attributes that together determine the price of a
  good via the demand for and supply of the
  characteristics in the market for that good.
• For example, the price of a residence can be
  viewed as a function of its size, age, physical
  condition, proximity to schools, quality of the
  environment etc

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Assumptions of hedonic pricing

• The market involved (housing or labour) is
  assumed to be in equilibrium.
• Needs to meet the assumptions for a market to be
  in equilibrium (see previous lecture on hedonic
  pricing)
• Buyers and sellers are assumed to be aware, and
  to appreciate the effects, of the environmental
  quality characteristic(s) of interest.
• There needs to be a sufficiently wide variety of
  choices that all combinations of characteristics
  are available in the market.

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Assumptions of hedonic pricing

• All three assumptions seem less likely to be
  fulfilled in applications in developing
  countries.
• Only a few favoured builders may be allowed to
  operate
• There may be residence requirements that do not
  permit free movement around a metropolitan area
• The awareness requirement seems less likely to be
  met because of the combination of lower
  educational levels, less environmental testing
  and regulation generally, and perhaps even
  control over the dissemination of sensitive
  information practiced by nervous regimes.

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Assumptions of hedonic pricing

• Even where markets are well functioning and
  individuals well informed, data collection may be
  much more problematic in developing countries.
• There is likely to be relative scarcity of
  monetary land and property transactions in many
  cultures. And those that do occur may not be
  recorded in a fashion required for economic
  analysis.
• Because of these reasons there are few hedonic
  pricing studies and few hedonic wage studies in
  developing countries.

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Travel cost

• Travel cost values a recreational site or
  characteristic by using the value of the time and
  other cost incurred in visiting the site as a
  proxy for what a visitor would be willing to pay
  to visit the site.
• The focus of travel cost studies on recreational
  value in developing countries has been on
  international visitors and therefore of limited
  use, as most applications to actual decisions
  confine attention to domestic WTP for the project
  being analyzed.

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Travel cost

• There is a different relationship between
  environmental quality and the recreational
  market in developing countries.
• Where people are poorer and have less access to
  transportation, travel for any sort of recreation
  may be very limited.
• As a result, travel cost may have limited use in
  estimating the domestic benefits of water
  treatment projects as they accrue via water-based
  recreational sites.

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Travel cost

• This is because few national incur the kinds of
  travel costs needed for travel cost to generate
  valid WTP estimates.
• The great majority of travel cost studies value a
  recreational site as it exists.
• Valuing the introduction of a new site or
  proposed changes to an existing site, as would be
  required for analysis of a water quality
  improvement project, requires more sophisticated
  versions.

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Contingent valuation

• The application of contingent valuation in
  developing countries is fairly new.
• The difficulties in applying revealed preference
  methods, particularly in estimating demand for
  water supply and sanitation, mean that
  hypothetical methodologies are now seen to enjoy
  an advantage over indirect methods in developing
  countries.

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Contingent valuation

• Can be used to address almost any policy question
  asked.
• Can measure use and nonuse values.
• Also, it may be easier to conduct contingent
  valuation surveys in developing countries than it
  is in developed countries.
• Higher response rates, with respondents receptive
  to listening and answering the questions posed
• Interviewers are relatively inexpensive to prices
  in industrialized countries
• Allows CV researchers to use larger sample sizes

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Challenges to using CV in developing countries

• Many developing countries may be only partially
  monetized, causing difficulties in translating
  values into monetary terms.
• Might use volumes of rice or grain instead.
• Need to translate the survey instrument into
  local languages or dialects.
• Considerable attention must be paid to local
  institutional and cultural issues.

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Challenges to using CV in developing countries

• The survey designers must be sensitive to the
  attitudes of local people and their perceptions
  about local, national and international
  institutions.
• Focus groups are a useful way to learn which
  payment vehicle, funding, and service delivery
  mechanism CV survey respondents are likely to
  trust.

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