Review of last lecture

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Review of last lecture

• Property rights for water
• Market valuation consumers and producers
  surplus and prices as a measure of resource
  scarcity
• Overview of nonmarket valuation
• WTP-WTA disparity
• Critical assessment of the economic approach to
  environmental valuation

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Contingent valuation What are you willing to
pay?Tim Capon
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Lecture outline

• Overview of contingent valuation (CV)
• Construction of a CV survey
• Practical issues
• Potential problems and biases
• Guidelines for CV
• Examples

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Contingent valuation

• What is your willingness to pay?
• Source Russell (2001, p. 328)

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Overview of contingent valuation

• What is your willingness to pay?
• Direct or stated preference approach
• Hypothetical market
• Measures both use and nonuse values

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What does contingent valuation measure?

• Total value Use value Non-use values
• Non-use value Option value
• Bequest value
• Existence value

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Non-use values

• Option value is the amount people are WTP to
  retain the option of possible future use.
• Bequest value is the amount that the present
  generation is WTP to preserve natural resources
  for the use of future generations.
• Existence value is the amount people are WTP for
  the satisfaction they derive from knowing that
  the natural environment exists and provides a
  habitat for plants and animals.

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Contingent valuation surveys

• In the contingent valuation approach, WTP is
  elicited by conducting a survey.
• Carefully select a sample from the relevant
  population
• Ask them about their WTP, contingent on changes
  in the availability and/or quality of an
  environmental amenity.
• The survey is designed in a way that people are
  faced with a hypothetical market-like choice and
  then asked about their WTP.

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Overview of a CV survey

• Composed of two major phases
• Scenario
• Valuation questions

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Scenario

• The scenario phase explains to participants the
  exact nature of the proposed action and how their
  involvement in the survey might influence the
  proposed activity under consideration.
• Kalamazoo Nature Center
• Describe the center in detail services it
  provides, habitats and species it protects
• Photographs and maps would be provided

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Scenario

• Describe the current condition of the Nature
  Center and what conditions would result if a
  proposed action is or is not implemented.
• What would happen to the area if the Nature
  Center had to close or substantially reduce
  services due to a lack of funds?
• The purpose of the scenario is to give
  respondents enough information about the relevant
  effects of the proposed actions so they will be
  able to consider how valuable those effects are
  to them.

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Valuation question

• What should the format of the questions in the
  survey be?
• Consider the context of the payment and the
  format of the valuation question.
• What is the mechanism through which payments
  would be collected?
• Questions are often framed as a referendum
• Would you vote yes or no on a ballot that would
  increase taxes in order to keep the nature center
  going?

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An example Kalamazoo Nature Center

• When answering the questions provided in this
  survey, please make sure to keep in mind the
  following three situations
• The Kalamazoo Nature Center is only one among
  many recreational opportunities in the Kalamazoo
  Area.
• (ii) Your income is limited and has several
  alternative uses.
• (iii) The following set of questions asks you to
  focus solely on KNC and not on other
  environmental issues or other parks and nature
  centers in the state.

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• What aspects of Kalamazoo Nature Center do you
  value?
• Quietude/get-away from the city
• Aesthetic/scenic beauty
• Protection of native plants and animals,
  including some rare habitats and species
• Availability to next generation
• Educational value
• I benefit from just knowing it exists
• I hope to visit KNC in the future

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• 2. How concerned are you about the possibility of
  the KNC/s closure?
• Very concerned
• A little concerned
• Not concerned at all

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• 3. As a taxpayer, how much of an increase in your
  annual taxes would you be willing to pay to
  support the continuation of the services
  currently provided by the KNC?
• 50
• 100
• 500
• Other (please specify) ________

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• 4. What is the maximum annual amount that you
  would be willing to pay to prevent closure of
  KNC?
• 5. Have you ever considered bequesting money to
  KNC to ensure its continued existence? If so, how
  much are you willing to give?
• 6. Would you be willing to act as a volunteer at
  the Nature Center in one of its educational
  programs, secretarial duties, maintenance, animal
  care, or other? If so, how many hours per week
  are you willing to spend?

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Other practical issues

• Most CV studies collect additional data on
  respondents demographic characteristics and
  socioeconomic circumstances.
• Contingent valuation may include questions
  specifically designed to determine the actual
  motivation of a respondents vote.
• Identification of the relevant population and
  sample size are important issues.
• The method used is also important e.g. telephone
  survey, mail survey etc

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Potential problems with CV

• Strategic bias
• Information bias
• Hypothetical bias
• Difficulties with the reference group for pricing
  e.g. valuation affected by income
• Whose preferences count?

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Strategic bias

• Paul Samuelson formulated the theory of public
  goods in the 1950s and identified the incentive
  to understate WTP produced by a situation in
  which payment will be required and will be
  related to stated WTP, while the good, once
  provided, will be provided to all regardless of
  their responses
• a classic public good problem leading to
  free-riding behaviour.

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Strategic bias?

• There is not much evidence in the literature that
  people systematically understate their WTP for
  hypothetical public goods. If anything, there is
  evidence of overstatement.
• There is substantial evidence that the single
  greatest difficulty facing application of direct
  questioning is peoples inability to know what
  their true WTP is for unfamiliar and
  difficult-to-understand goods such as changes
  in environmental quality.

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Cognitive difficulties and lack of knowledge

• Can respondents know their true preferences?
• The embedding effect
• Difference between open-ended questions and
  dichotomous choices questions.

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Scope testing

• Scope testing allows the possible effects of
  embedding to be examined. Scope testing involves
  presenting at least two alternative impact
  scenarios to population sub-samples and testing
  for differences between the estimates generated.

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Warm glow effect

• People derive some pleasure from announcing that
  they are WTP some amount for a worthwhile
  environmental result.

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Lexicographic preferences

• If individuals hold an ethical position where
  they refuse to trade off environmental quality
  for money they are said to hold a lexicographic
  position.
• Stevens et al (1991) value of four wildlife
  species and follow up questions
• 25 percent of respondents who were unwilling to
  pay for the preservation of the species stated
  ethical reasons, claiming that wildlife should
  not be measured by monetary means.

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Consumers versus Citizens

• When answering contingent valuation questions,
  individuals no longer act as consumers trying to
  maximize utility, that is, as egoists, but take
  on the role of the citizen where other ethical
  considerations predominate.

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NOAA panel report

• Exxon Corporation put to work a group of
  scholars, mostly economists with excellent
  reputations but little prior involvement in CV,
  to examine CV critically. In April 1992, this
  group released their conclusions, that they had
  tested CV in several ways and found it thoroughly
  unsatisfactory, at a public meeting in
  Washington, D.C..

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NOAA panel report

• Soon afterward, NOAA convened a panel of experts
  to report on the validity of CV for measuring
  passive-use (non-use) value. In this report, CV
  was endorsed
• Provided CV met a number of guidelines
• E.g. personal interviews, referendum formats
  with a no answer option, and follow up
  questions.

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Burden of proof requirements

• High non-response rate
• Lack of belief in the scenario
• Lack of understanding of the task
• Votes not explained by reference to value or cost
  of the program

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Referendum format

• Requires only a binary response to a stated tax
  price, which is an easier task than calculating
  and reporting ones WTP
• Allow a no answer option. No answer responses
  would be combined with no responses, reserving
  the yes category for those who are reasonably
  confident in their response.

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Linking the ecological and economic values of
wetlands A case study of the wetlands of Moreton
Bay

• Elizabeth Clouston
• It is estimated that 50 of wetlands have been
  lost worldwide.
• As ecological attributes cannot be show to
  respondents they must be described and this is
  likely to be the only information available to
  respondents on which to base their valuation.

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Ecological value

• A systems ecological value can be determined
  from and defined as its productivity, ability to
  provide habitats for its dependent species and
  the diversity of species and organisation it
  supports.
• The purpose of the CV study was to determine if
  ecological values could be captured using an
  economic valuation method.
• To examine the effect of providing ecological
  information to respondents.

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Four versions of the questionnaire

• Case A no extra information
• Case B information about ecological values of
  the wetlands
• Case C information about direct and indirect
  uses of the wetlands
• Case D information about non-use values (bequest
  and existence values) of the vulnerable and
  endangered species that are dependent on the
  wetlands in Moreton Bay for at least part of
  their life cycle

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Information provided to respondents

• The good on offer in this survey was an
  increase in water quality, which would result in
  the preservation of wetlands in Moreton Bay.
• Increased sediment increases turbidity and
  decreases light availability which together with
  increased nutrient loads have been linked to
  seagrass decline.

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Information provided on the provision of the good

• The areas of marine vegetation in Moreton Bay are
  under threat due to the effects of low quality
  water coming from the rivers into the Bay. This
  poor quality water effects the mangroves and
  seagrasses which means that they can no longer
  function properly and in some cases results in
  their complete loss.

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Information provided on the provision of the good

• To stop the loss of the wetlands the Local
  councils and State government have prepared a
  Waterways Management Plan. Some actions
  identified in the plan are being undertaken by
  Local and State governments. Other activities
  have not yet been undertaken due to a lack of
  funding.

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Payment vehicle

• In the context of the wetlands of Moreton Bay the
  most feasible methods for collecting (actual)
  payments would be through the use of increased
  council rates, taxes or a contribution to a
  voluntary conservation fund.

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Bid elicitation question

• A non-government Conservation Trust fund could be
  set up that specifically undertakes actions as
  identified by the Waterways Management Plan to
  improve water quality in Moreton Bay. If such a
  fund was set up to specifically undertake actions
  that would improve water quality and hence
  protect the wetlands of Moreton Bay, and keeping
  in mind your household budget and other areas of
  environmental spending, would you be willing to
  make a once off contribution of 20?

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Food safety

• BSE was found in Japan in September 2001
• Annual Japanese beef consumption had tripled over
  recent decades to about 9.5 kg per person
• By the end of November after a total of 3 cases
  of BSE, sales of beef had fallen by 70 percent.

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Beef in Britain

• In 1984 the first cases of BSE in Britain
• In 1986 BSE was recognised as a nervous system
  disease caused by prions
• The primary cause was discovered to be recycling
  of cattle, where meat-and-bone meal derived from
  diseased cattle was included as an ingredient in
  cattle-feed.

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Ruminants for Ruminants

• In 1988, Britain banned the domestic use of
  meat-and-bone meal made from ruminants for
  ruminants.
• Kept exporting it until 1996.
• In 1996, the British government announced that
  vCJD was contracted from eating BSE-infected beef
  and banned the export of meat-based cattle feed.
• Up until 1996, Japan was a major importer of
  meat-and-bone meal.

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Beef in Britain

• In 1988, Britain banned the domestic use of
  meat-and-bone meal made from ruminants for
  ruminants.
• Kept exporting it until 1996.
• In 1996, the British government announced that
  vCJD was contracted from eating BSE-infected beef
  and banned the export of meat-based cattle feed.
• Up until 1996, Japan was a major importer of
  meat-and-bone meal.

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Advertising in Japan

• McDonalds Japan ran a 4.1 million advertising
  campaign, announcing that McDonalds uses only
  beef from Australia, where the mad cow disease
  does not exist.

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The survey

• 2December 2001 at a grocery-store
• Interviewed 400 people
• 11 percent of respondents indicated that they now
  avoid eating beef after the BSE outbreak.
• Of the beef eaters, 23 percent eat it daily or at
  least once a week and 66 percent each beef at
  least onece a month.
• 86 percent answered that they have been consuming
  less since the BSE outbreak.

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The WTP question

• Dichotomous choice question with premiums on the
  price of beef set at 5, 10, 25, 40 and 50
  percent.
• 65.9 percent responded that they were WTP a
  premium for BSE-tested beef.
• Consumers were WTP a significant premium (over
  50) on average for BSE-tested beef.

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Recreational fishing in New Zealand

• Estimates the value of recreational fishing in
  New Zealand. Data was obtained from a large-scale
  interview study conducted at boat ramps across
  New Zealand.
• Scarcity of fish stocks increases conflict
  between commercial and recreational fishers.

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The CV study

• Over 4000 interviews with fishers on their return
  from a day trip between December 1998 to April
  1999.
• Survey focused on the 5 main fish species
  targeted by recreational fishers
• Snapper, blue cod (mainly for consumption)
• Kingfish, Kahawai (mainly for sport)
• Rock lobster (consumption and sport)

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Other variables

• Being a member of a fish club
• Income
• Working full-time
• Owning a boat with an echo sounder
• A greater enjoyment associated with the fishing
  trip that day
• Targeting either kingfish or blue cod on the
  fishing trip
• An increase in the amount of time spent fishing
• The amount of time usually spent on fishing trips
• Fishing with people other than members of the
  household

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Robustness of results

• Test for strategic bias Do you believe that the
  government will impose a recreational fishing tax
  in the next year or so?
• Embedding effects
• Hypothetical bias