Valuation 4: The Contingent Valuation Method

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Valuation 4 The Contingent Valuation Method

• Why value?
• What to value?
• What method to use?
• Why stated preferences?
• Example Seoul water
• CVM study design
• Validity, realibility, biases

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Why?

• We must make choices about how to manage the
  human impact on natural systems
• Greater use of a particular environmental service
  or greater protection of a specific natural
  system results in less of something else
  (trade-off)
• To make the most of scarce resources we must
  compare what is gained from an activity with what
  is sacrificed by undertaking that activity
• Why? To assess the net impact of changes

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Uses of Economic Valuation

• Regulation can either seek optimum or not
• If an optimum is sought, the marginal external
  cost function must be estimated, and expressed in
  money
• Find optimum Marginal benefit equals marginal
  cost (Cost-Benefit Analysis)
• Ex ante, e.g., Pigou tax
• Ex post, e.g., evaluation of policy
• Demonstrate value of environment
• Extend national accounts

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Criterion for Cost-benefit Analysis

• benefits and costs are meaningless without a
  social welfare function
• defines good an bad consequences
• In economics the criterion is the well-being of
  the members of society
• Well-being is defined as
• the individuals preferences and
• their max. willingness to pay for gains or (WTP)
• their min. willingness to accept compensation for
  losses (WTA)

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WTP and WTA

• WTP is limited to an individuals income, WTA is
  unbounded
• If an individual has the legal right, WTA is the
  appropriate concept
• It can be difficult to determine property rights
  (public goods)
• Sometimes the current allocation is taken as the
  legal entitlement
• Improvements WTP
• Reductions WTA

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WTP and WTA

• In the diagram WTA gtWTP
• This holds whenever the indifference curves are
  convex and the environmental good is normal
• Consumption increases with income at given price
• The ratio between WTA and WTP will be greater
• The greater the difference between q0 and q1
• The less substitutability between private
  consumption and the environmental good

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WTP v WTA

• People view gains and losses differently
• Confirmed by empirical studies, but not
  uncontested
• Implies that surveys, policies need to be
  carefully designed

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Welfare measures

• WTP/WTAC relates to EV/CV as price relates to
  consumer surplus
• Willingness to pay and equivalent variation
  belong together both take current utility as
  base
• Willingness to accept compensation and
  compensating variation belong together both take
  new utility as base

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What to value?

• Individuals can derive value from environmental
  goods from more sources than direct consumption
• Types of environmental services
• source of materials input fossil fuel, wood
  products, fish, water etc.
• life-support services liveable climatic regime,
  breathable atmosphere
• Amenity services recreation, wildlife
  observation, scenic view, passive use values

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Total Economic Value of Nature Goods Services
Direct Use Values
Indirect Use Values
Option Values
Bequest Values
Existence Values
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Direct Indirect Valuation

• Direct methods (use and non-use values)
• Hypothetical market
• Contingent valuation
• Indirect methods (use values)
• Surrogate market
• Hedonic pricing
• Travel cost

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Hedonic Pricing

• We try to estimate the demand curve for a
  non-market good by observing market behaviour in
  the market for the related good
• HPM uses a market good within which the
  non-market good is implicitly traded
• Property prices also reflect environmental
  amenities
• Example noise pollution same house in a quite
  area is likely to be more expensive

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Travel Costs

• Method to value the use of natural resources for
  recreational purposes
• Access to recreational sites command seldom a
  price
• Basic premise time and travel cost expenses to
  visit the site represent the price
• TWP to visit a site can be estimated by the
  number of trips that they make at different
  travel costs
• Proceed as above, with hedonic pricing
• Both do not capture total value

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Contingent Valuation

• Revealed preference methods can only estimate the
  use value of the environment, and only if that
  value affects behaviour in a measurable and
  interpretable manner
• For the rest, we have to use either hypothetical
  markets or experimental markets (together
  constructed)
• Experimental markets have delivered little
  estimates (but a lot of insights), so the
  contingent valuation method remains this is a
  stated preference method

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History

• First applications in early 1960s to value
  outdoor recreation
• 1979 the Water Resource Council recommended CV as
  one of 3 methods to determine project benefits
• In the mid 1970s the EPA funded a research
  program to determine the promise and problems of
  the method
• The Reagan Executive Order 12291 (1981)
• All federal regulations on environmental policy
  should be submitted to a Cost-Benegfit Analysis
• 1989 governmental decision on legitimacy of
  non-use values for TEV and equal standing
• 1989 Exxcon Valdez oil spill
• value loss of non-use values for US citizens

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Example Drinking Water in Seoul

• A Interviewer introduction
• B Background
• 1. Opinion about current tap water quality
• 2. Measures to improve water quality
• C Value of water quality
• Describe major pollution accident in 1991
• If no action, how likely is a repetition?
• Describe pollution prevention system
• How much are you willing to pay?
• D Socio-economic characteristics

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Define market scenario

• What is being valued? A day at the beach, a view
  of the beach? Pollution of a single beach, or all
  beaches?
• What is being valued is a policy intervention or
  a change in pollution these have to be
  plausible and comprehensible
• What is the payment vehicle? A tax, an entrance
  fee, a levy on parking note that people have
  opinions on these

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Choose elicitation method

• Direct question How much are you willing to pay?
• Bidding game Are you willing to pay X? If yes,
  Xd? If no, X-d?
• Payment card Choose from a list of numbers,
  including comparisons
• Referendum choice Are you willing to pay X? for
  different X, to many people
• (Note we are looking for the maximum amount)

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Administration Sample

• Mail No feedback or clarification possible
• Telephone Has to be simple and short, no
  graphical material
• In-person Expensive, interviewer bias
• Are the people approached a representative
  sample? And those who answered? Does the survey
  itself induce a bias, for example, in knowledge?

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Experiment Estimation

• If one hypothesizes a relationship between WTP
  and income, then the suggested values (payment
  card, bidding game, referendum) have to be
  independent of income
• If one hypothesizes a relationship between WTP
  and policitical colour, then one should include a
  question about the interviewees political
  opinions
• But sample sizes need to be small, and interviews
  short!

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Validity

• Content (face) validity Does what is measured
  and what is supposed to be measured coincide?
• Criterion validity Do the measured values
  correspond to other measurements of the same
  thing?
• Construct/convergent validity Do the measured
  values correlate to measurements of similar
  things?
• Construct/theoretical validity Do the
  measurements correspond to predictions?

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Reliability

• The more familiar people are with the good and
  the scale, the more reliable the measured values
• For public goods, referenda and taxes are perhaps
  best for (quasi-)private goods, individual
  questions and entrance fee may be better
• The payment vehicle may distort the measure
• Payment cards and perhaps bidding games give the
  most reliable results

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Potential Biases

• Incentive
• Strategic
• Compliance
• Implied value
• Starting point
• Range
• Relational
• Importance
• Position
• Misspecification
• Theoretical
• Amenity
• Context

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Incentive Biases

• The interviewee deliberately gives a false answer
• Strategic bias Influence the outcome
• Compliance/sponsor bias Comply with presumed
  expectations
• Compliance/interview bias Try to please/impress
  the interviewer
• Protest votes Interviewees may object to
  valuation per se, or to being interviewed

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Implied Value Biases

• Starting point bias, in the bidding game
• Range bias, in the payment card
• Relational bias, if examples of other
  contributions are mentioned
• Importance bias The fact that the interviewer
  bothers to ask ...
• Position bias, if multiple goods are valued

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Misspecification Biases

• Theoretical
• Amenity/symbolic The percieved good is different
  than intended
• Amenity/part-whole The interviewee thinks the
  good is wider or narrower than intended
  (geographical, issue, policy)
• Amenity/metric Different measurement
• Amenity/probability Different assessments of the
  chance of delivery

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Misspecification Biases -Context

• Misspecification of the market scenario
• payment vehicle
• property right WTP/WTA
• method of provision like payment vehicle
• budget constraint ability to pay
• elicitation maximum WTP?
• instrument survey may confuse interviewees
• question order