Contingent valuation
Encyclopedia
Contingent valuation is a survey
-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination. While these resources do give people utility
, certain aspects of them do not have a market price
as they are not directly sold – for example, people receive benefit from a beautiful view of a mountain, but it would be tough to value using price-based models. Contingent valuation surveys are one technique which is used to measure these aspects. Contingent valuation is often referred to as a stated preference model, in contrast to a price-based revealed preference
model. Both models are utility-based. Typically the survey asks how much money people would be willing to pay
(or willing to accept) to maintain the existence of (or be compensated for the loss of) an environmental feature, such as biodiversity.
of a non-market good. The first practical application of the technique was in 1963 when Davis used surveys to estimate the value hunters and tourists placed on a particular wilderness area. He compared the survey results to an estimation of value based on travel costs and found good correlation with his results.
The method rose to high prominence in the 1980s when government agencies were given the power to sue for damage to environmental resources which they were trustees over. Following Ohio v Department of the Interior, the types of damages which they were able to recover included non-use or existence value
s. Existence values are unable to be assessed through market pricing mechanisms so contingent valuation surveys were suggested to assess them. During this time the EPA convened an important conference with an aim to recommend guidelines for survey design. The Exxon Valdez oil spill
in Prince William Sound
was the first case where contingent valuation surveys were used in a quantitative assessment of damages. Use of the technique has spread from there.
for a good, preferring to rely on people's revealed preference
s in binding market transactions. Early contingent valuation surveys were often open-ended questions of the form "how much compensation would you demand for the destruction of X area" or "how much would you pay to preserve X". Such surveys potentially suffer from a number of shortcomings; strategic behaviour, protest answers, response bias
and respondents ignoring income constraints. Early surveys used in environmental valuation seemed to indicate people were expressing a general preference for environmental spending in their answers, described as the embedding effect
by detractors of the method.
In response to criticisms of contingent valuation surveys, a panel of high profile economists (chaired by Nobel Prize
laureates Kenneth Arrow
and Robert Solow
) was convened under the auspices of the National Oceanic and Atmospheric Administration
(NOAA) in 1993. The panel heard evidence from 22 expert economists and published its results in 1995. The recommendations of the NOAA panel were that contingent valuation surveys should be carefully designed and controlled due to the inherent difficulties in eliciting accurate economic values through survey methods
.
The most important recommendations of the NOAA panel were that:
The guiding principle behind these recommendations was that the survey operator has a high burden of proof to satisfy before the results can be seen as meaningful. Surveys meeting these criteria are very expensive to operate and to ameliorate the expense of conducting surveys the panel recommended a set of reference surveys which future surveys could be compared to and calibrated against. The NOAA panel also felt, in general, that conservative estimates of value were to be preferred and one important consequence of this decision is that they recommended contingent valuation surveys measure willingness to pay to protect the good rather than willingness to accept compensation for the loss of the resource.
As a result, current contingent valuation methodology corrects for these shortcomings, and current empirical testing indicates that such bias and inconsistency has been successfully addressed.
technique, particularly in contaminated property or other situations where revealed preference models (i.e. transaction pricing) fail due to disequilibrium in the market. McLean, Mundy, and Kilpatrick (1999) demonstrate the acceptability of contingent valuation in real estate expert testimony, and the current standards for use of contingent valuation in litigation situations is described by Diamond (2000).
The technique has been widely used by government departments in the US when performing cost-benefit analysis
of projects impacting, positively or negatively, on the environment. Examples include a valuation of water quality and recreational opportunities in the river downstream from Glen Canyon dam, biodiversity
restoration in the Mono Lake and restoration of salmon
spawning grounds in certain rivers. The technique has also been used in Australia to value areas of the Kakadu National Park
as well as trophy property in the United States, and is recognized as a valuable tool in the appraisal of brownfields.
Statistical survey
Survey methodology is the field that studies surveys, that is, the sample of individuals from a population with a view towards making statistical inferences about the population using the sample. Polls about public opinion, such as political beliefs, are reported in the news media in democracies....
-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination. While these resources do give people utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
, certain aspects of them do not have a market price
Market price
In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics...
as they are not directly sold – for example, people receive benefit from a beautiful view of a mountain, but it would be tough to value using price-based models. Contingent valuation surveys are one technique which is used to measure these aspects. Contingent valuation is often referred to as a stated preference model, in contrast to a price-based revealed preference
Revealed preference
Revealed preference theory, pioneered by American economist Paul Samuelson, is a method by which it is possible to discern the best possible option on the basis of consumer behavior. Essentially, this means that the preferences of consumers can be revealed by their purchasing habits...
model. Both models are utility-based. Typically the survey asks how much money people would be willing to pay
Willingness to pay
In economics, the willingness to pay is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good or to avoid something undesired, such as pollution...
(or willing to accept) to maintain the existence of (or be compensated for the loss of) an environmental feature, such as biodiversity.
History
Contingent valuation surveys were first proposed in theory by S.V. Ciriacy-Wantrup (1947) as a method for eliciting market valuationValuation (finance)
In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...
of a non-market good. The first practical application of the technique was in 1963 when Davis used surveys to estimate the value hunters and tourists placed on a particular wilderness area. He compared the survey results to an estimation of value based on travel costs and found good correlation with his results.
The method rose to high prominence in the 1980s when government agencies were given the power to sue for damage to environmental resources which they were trustees over. Following Ohio v Department of the Interior, the types of damages which they were able to recover included non-use or existence value
Existence value
Existence values are an unusual and somewhat controversial class of economic value, reflecting the benefit people receive from knowing that a particular environmental resource, such as Antarctica, the Grand Canyon, endangered species, or any other organism or thing exists.Existence value is a...
s. Existence values are unable to be assessed through market pricing mechanisms so contingent valuation surveys were suggested to assess them. During this time the EPA convened an important conference with an aim to recommend guidelines for survey design. The Exxon Valdez oil spill
Exxon Valdez oil spill
The Exxon Valdez oil spill occurred in Prince William Sound, Alaska, on March 24, 1989, when the Exxon Valdez, an oil tanker bound for Long Beach, California, struck Prince William Sound's Bligh Reef and spilled of crude oil. It is considered to be one of the most devastating human-caused...
in Prince William Sound
Prince William Sound
Prince William Sound is a sound off the Gulf of Alaska on the south coast of the U.S. state of Alaska. It is located on the east side of the Kenai Peninsula. Its largest port is Valdez, at the southern terminus of the Trans-Alaska Pipeline System...
was the first case where contingent valuation surveys were used in a quantitative assessment of damages. Use of the technique has spread from there.
Past controversies
Many economists question the use of stated preference to determine willingness to payWillingness to pay
In economics, the willingness to pay is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good or to avoid something undesired, such as pollution...
for a good, preferring to rely on people's revealed preference
Revealed preference
Revealed preference theory, pioneered by American economist Paul Samuelson, is a method by which it is possible to discern the best possible option on the basis of consumer behavior. Essentially, this means that the preferences of consumers can be revealed by their purchasing habits...
s in binding market transactions. Early contingent valuation surveys were often open-ended questions of the form "how much compensation would you demand for the destruction of X area" or "how much would you pay to preserve X". Such surveys potentially suffer from a number of shortcomings; strategic behaviour, protest answers, response bias
Response bias
Response bias is a type of cognitive bias which can affect the results of a statistical survey if respondents answer questions in the way they think the questioner wants them to answer rather than according to their true beliefs...
and respondents ignoring income constraints. Early surveys used in environmental valuation seemed to indicate people were expressing a general preference for environmental spending in their answers, described as the embedding effect
Embedding effect
The embedding effect is an issue in environmental economics.The effect suggests the contingent valuation method is not an unbiased approach to measuring policy impacts for cost-benefit analysis of environmental, and other government, policies. Few government policies are independent of any other...
by detractors of the method.
In response to criticisms of contingent valuation surveys, a panel of high profile economists (chaired by Nobel Prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
laureates Kenneth Arrow
Kenneth Arrow
Kenneth Joseph Arrow is an American economist and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51....
and Robert Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...
) was convened under the auspices of the National Oceanic and Atmospheric Administration
National Oceanic and Atmospheric Administration
The National Oceanic and Atmospheric Administration , pronounced , like "noah", is a scientific agency within the United States Department of Commerce focused on the conditions of the oceans and the atmosphere...
(NOAA) in 1993. The panel heard evidence from 22 expert economists and published its results in 1995. The recommendations of the NOAA panel were that contingent valuation surveys should be carefully designed and controlled due to the inherent difficulties in eliciting accurate economic values through survey methods
Survey sampling
In statistics, survey sampling describes the process of selecting a sample of elements from a target population in order to conduct a survey.A survey may refer to many different types or techniques of observation, but in the context of survey sampling it most often involves a questionnaire used to...
.
The most important recommendations of the NOAA panel were that:
- Personal interviews be used to conduct the survey, as opposed to telephone or mall-stop methods.
- Surveys be designed in a yes or no referendum format put to the respondent as a vote on a specific tax to protect a specified resource.
- Respondents be given detailed information on the resource in question and on the protection measure they were voting on. This information should include threats to the resource (best and worst-case scenarios), scientific evaluation of its ecological importance and possible outcomes of protection measures.
- Income effects be carefully explained to ensure respondents understood that they were to express their willingness to pay to protect the particular resource in question, not the environment generally.
- Subsidiary questions be asked to ensure respondents understood the question posed.
The guiding principle behind these recommendations was that the survey operator has a high burden of proof to satisfy before the results can be seen as meaningful. Surveys meeting these criteria are very expensive to operate and to ameliorate the expense of conducting surveys the panel recommended a set of reference surveys which future surveys could be compared to and calibrated against. The NOAA panel also felt, in general, that conservative estimates of value were to be preferred and one important consequence of this decision is that they recommended contingent valuation surveys measure willingness to pay to protect the good rather than willingness to accept compensation for the loss of the resource.
As a result, current contingent valuation methodology corrects for these shortcomings, and current empirical testing indicates that such bias and inconsistency has been successfully addressed.
Current status
As shown by Mundy and McLean (1998), contingent valuation is now widely accepted as a real estate appraisalReal estate appraisal
Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
technique, particularly in contaminated property or other situations where revealed preference models (i.e. transaction pricing) fail due to disequilibrium in the market. McLean, Mundy, and Kilpatrick (1999) demonstrate the acceptability of contingent valuation in real estate expert testimony, and the current standards for use of contingent valuation in litigation situations is described by Diamond (2000).
The technique has been widely used by government departments in the US when performing cost-benefit analysis
Cost-benefit analysis
Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
of projects impacting, positively or negatively, on the environment. Examples include a valuation of water quality and recreational opportunities in the river downstream from Glen Canyon dam, biodiversity
Biodiversity
Biodiversity is the degree of variation of life forms within a given ecosystem, biome, or an entire planet. Biodiversity is a measure of the health of ecosystems. Biodiversity is in part a function of climate. In terrestrial habitats, tropical regions are typically rich whereas polar regions...
restoration in the Mono Lake and restoration of salmon
Salmon
Salmon is the common name for several species of fish in the family Salmonidae. Several other fish in the same family are called trout; the difference is often said to be that salmon migrate and trout are resident, but this distinction does not strictly hold true...
spawning grounds in certain rivers. The technique has also been used in Australia to value areas of the Kakadu National Park
Kakadu National Park
Kakadu National Park is in the Northern Territory of Australia, 171 km southeast of Darwin.Kakadu National Park is located within the Alligator Rivers Region of the Northern Territory of Australia. It covers an area of , extending nearly 200 kilometres from north to south and over 100 kilometres...
as well as trophy property in the United States, and is recognized as a valuable tool in the appraisal of brownfields.
External links
- Misleading Quantification: The Contingent Valuation of Environmental Quality (Robert K. Niewijk)
- Association of Environmental and Resource Economists (AERE).
- - JEEM: Journal of Environmental Economics and Management (AERE's official "technical" journal).
- - REEP: Review of Environmental Economics and Policy (AERE's official "accessible" journal).
- Economics of Natural Resource Decisions: Gardner Brown (University of Washington Office of Research)