ECON 6012

Cost Benefit Analysis

Memorial University of Newfoundland

Lesson 10 (Chapter 15)

CONTINGENT VALUATION: USING
SURVEYS TO ELICIT INFORMATION ABOUT
COSTS AND BENEFITS
Purpose
Overview of contingent valuation (CV)
surveys, review criticisms of CV, and consider
the strengths and weaknesses of the most
commonly used CV methods.
Purpose
For some public goods, there are no obvious
ways to determine preferences through
observation of behaviors => no option to use
revealed preference methods
In these cases, there may be no alternative to
asking a sample of people questions about their
valuations.
Purpose
The primary use of CV is to elicit peoples
Willingness-to-Pay (WTP) for changes in the
quantity of a good.
Valuing use or potential use goods with
CV is relatively non-controversial.
Valuing passive use (nonuse) goods with CV is
more controversial.
Stated versus revealed preference methods

We can ask them => stated preference

methods (Contingent Valuation)
We can try to infer it from their behaviour in
other markets => revealed preference
methods
The latter include the Travel Cost Method
and the Defensive Expenditure Method, both
based on the Production Function Approach,
and Hedonic Price Methods
Stated versus revealed preference methods

Revealed preference methods exploit the

idea that some environmental goods/services
are related to marketed goods
In particular, we may want to find
substitutes or complements of those
environmental services we want to value
Stated versus revealed preference methods

With stated preference methods, we do not need

that
We simply ask!
Example of these methods include contingent
behaviour, conjoint analysis, choice experiments,
contingent ranking and other complex procedures in
constant developing
They are all based on asking individuals to state a
preference and inferring information from that
We will focus on the contingent valuation method
 Contingent Valuation

Contingent Valuation Methods (CVM) try to

directly get the values of WTP or WTA by
interviewing a sample of consumers and
presenting them with a hypothetical market
We want to ask about WTP contingent on the
existence of a market
 CVM steps

Set the hypothetical market

obtain bids

estimate mean/median WTP or WTA

estimate bid curves

aggregate the data (from sample to population)

evaluate your CVM exercise

 Set the hypothetical market

Describe the hypothetical environmental

market, make it realistic and informative
What is the environmental good?

How would the payments be made? (bid

vehicle)
Who would pay? When? How often? How?
Obtain bids

Obtain the WTP/WTA for the environmental good

using a certain type of elicitation format :
a bidding game (higher and higher amounts are
suggested until the maximum WTP is reached)
close-ended referendum (so we get just a YES/NO
answer) aka dichotomous choice
Sometimes a compromise is the double-bounded
dichotomous choice format
Obtain bids

Obtain the WTP/WTA for the environmental good

using a certain type of elicitation format :
as a payment card (suggesting different values to
choose from)
as an open ended question: How much? (this is
quite difficult to answer normally)
Obtain bids

Obtain the WTP/WTA for the environmental good

using a certain type of elicitation format:
Exploit the idea of contingent behaviour: how
many trips would you make? How many wolves
would you sponsor?
 Obtain bids
Obtain the WTP/WTA for the environmental good using a
certain type of elicitation format:
Contingent Ranking Method: rank specific feasible
combinations of the good being valued and monetary
payments.
An example would be low water quality and low taxes vs.
high quality and high taxes, including several combinations in
between.
 Obtain bids
Obtain the WTP/WTA for the environmental good using a
certain type of elicitation format:
This method makes it is easier for the respondent to answer
(ordinal procedure).
The WTP must be inferred from the rankings, however,
rather than being directly elicited. Also, responses tend to be
sensitive to the order in which the alternatives are given.
Obtain bids

Obtain the WTP/WTA for the environmental good

using a certain type of elicitation format.
You must also frame the question within a
realistic scenario, who is going to pay?
Yearly? Only once? Will it be compulsory?
A tax?...
Obtain bids

Obviously the survey needs to be

administered
It may matter whether you use mail, phone,
internet, or in-person surveys
Sometimes it matters the clothes the
interviewers wear!!!!
Desirability bias could be an issue
Estimate mean/median WTP or WTA

From the sample calculate an average bid,

normally the mean and the median (which
disregards extreme answers) are used
Check for protest bids (zero WTP or
ridiculous WTA) and other outliers
 Estimate bid curves

Then try to investigate why different people

give different answers
Estimate WTP as a function of income, sex,
age, education, and level of environmental good
bid for (scope)
 Estimate bid curves

Imagine you ask people whether or not they would be

willing to pay $X dollars for a certain environmental
improvement.
If you ask different people about different amounts,
you can track the relationship: the probability that they
agree with the payment should decrease with the size of
the bid
This is the essence of it
 Aggregate the data

Aggregate the data (from sample to population)

What is the relevant population?

Did we use a really random sample or does the

exercise need correction for sample bias?
If the aggregation is over time, what type of
discount rate do we use?
Evaluate your CVM exercise
Sources of biases:
strategic bias (associated with free-riding)

If the respondents think that the real

payment may be related to the hypothetical
answer => understate (free ride)
If the respondents think that the real
payment will not be related to the hypothetical
answer => overstate if you think that the value
for you form the good exceeds the expected
payment!
Evaluate your CVM exercise

Sources of biases:
design bias (sample bias, non-response
bias, bid vehicle bias, starting point bias,
information bias, given changes WTP, so
WTP and WTA values become endogenous to
the valuation process, interviewer bias)
Evaluate your CVM exercise

Sources of biases:
Mental account bias (would they spend all
their money to save the tigers and all they
money to save the whales???)
This is also related to the notion of scope
bias. Sometimes the respondents give the
same WTP for saving one wolf, for 100
wolves, and for all wild mammals! (see
Embedding Effects)
The main advantage of CVM

Itis the best method, the only one, to

ascertain non-use values!
Including:

Existence value

Bequest value (which some really consider a

type of use value)
Option Value (which some really consider a
type of use value)
The main advantage of CVM

Itis the best method, the only one, to

ascertain non-use values!
This is because you do not need to observe
any behaviour in any type of real market
Therefore you can value anything
The main disadvantage of CVM

It is all hypothetical
This is because you do not observe any real
behaviour in any type of real market
It is a bit wishy-washy for some

Traditionally, economists prefer to observe

the choices made about real things paid by
with real money
The main disadvantage of CVM

Traditionally, economists prefer to observe

the choices made about real things paid by
with real money
In this sense, it is interesting to compare the
results of the valuation of something that can
bought for real using CVM and using real data
Often the CVM overestimates WTP
Other disadvantages of CVM

There are other, more technical disadvantages you

do not need to worry about at this stage
They have to do with the distinction between WTA
and WTP
And also, for most elicitation formats with the way
to go from the answers to the question to some form
of demand curve
The econometrics are complex and need many
assumptions to be made by the researcher
Other disadvantages of CVM

Apart from that, there is a variety of biases

that can affect CVM
A well designed study that aims at avoiding
those biases can become very costly!
Using up too many resources to get to know
how much something is worth is not really
great!
Philosophical disadvantages

These are common to other tools related to

cost-benefit analysis of course
Should humans opinion be the only one that
counts???
Why dont we just ask the experts, instead of
asking everyone?
Philosophical disadvantages

WTP depends not only on how much one

likes/needs something: WTP depends on
ability to pay
The values of environmental goods are a
function of incomes
If the distribution of income changes the
estimated values could change!
Keywords
stated preference methods
Contingent Valuation Method (CVM)

revealed preference methods

sample bias

protest bids

outliers
Keywords
strategicbias
design bias

bid vehicle

starting-point bias

Mental account bias

non-use value

existence value

Bequest value

Option Value
NEXT
More on shadow prices
READ CHAPTER 15