Contingent valuation

Last updated

Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of externalities like pollution. 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.

Contents

History

Contingent valuation surveys were first proposed in theory by S.V. Ciriacy-Wantrup (1947) as a method for eliciting market valuation of a non-market good. The first practical application of the technique was in 1963 when Robert K. 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. This work was published as his Ph.D. Dissertation at Harvard "The Value of Outdoor Recreation: An Economic Study of the Maine Woods." See also: [1] This work, and other early applications of the method are described in Chapter 1 of "Using Surveys to Value Public Goods" by Robert Cameron Mitchell, and Richard T. Carson [2] .

The method rose to high prominence in the USA 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 values. 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.

Past controversies

Many economists question the use of stated preference to determine willingness to pay for a good, preferring to rely on people's revealed preferences 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. [3] 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 United States National Oceanic and Atmospheric Administration (NOAA). [4] [5] [6] The panel heard evidence from 22 expert economists and published its results in 1993. [4] [6] [5] 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. [7]

Current status

As shown by Mundy and McLean (1998), contingent valuation is now widely accepted as a real estate appraisal technique, particularly in contaminated property or other situations where revealed preference models (i.e. transaction pricing) fail due to disequilibrium in the market. [8] McLean, Mundy, and Kilpatrick (1999) demonstrate the acceptability of contingent valuation in real estate expert testimony, [9] and the current standards for use of contingent valuation in litigation situations is described by Diamond (2000). [10]

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 [11] as well as trophy property in the United States, and is recognized as a valuable tool in the appraisal of brownfields. [12]

See also

Related Research Articles

<span class="mw-page-title-main">Environmental economics</span> Sub-field of economics

Environmental economics is a sub-field of economics concerned with environmental issues. It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world. ... Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming."

The value of life is an economic value used to quantify the benefit of avoiding a fatality. It is also referred to as the cost of life, value of preventing a fatality (VPF), implied cost of averting a fatality (ICAF), and value of a statistical life (VSL). In social and political sciences, it is the marginal cost of death prevention in a certain class of circumstances. In many studies the value also includes the quality of life, the expected life time remaining, as well as the earning potential of a given person especially for an after-the-fact payment in a wrongful death claim lawsuit.

Free-market environmentalism argues that the free market, property rights, and tort law provide the best means of preserving the environment, internalizing pollution costs, and conserving resources.

Ecosystem valuation is an economic process which assigns a value to an ecosystem and/or its ecosystem services. By quantifying, for example, the human welfare benefits of a forest to reduce flooding and erosion while sequestering carbon, providing habitat for endangered species, and absorbing harmful chemicals, such monetization ideally provides a tool for policy-makers and conservationists to evaluate management impacts and compare a cost-benefit analysis of potential policies. However, such valuations are estimates, and involve the inherent quantitative uncertainty and philosophical debate of evaluating a range non-market costs and benefits.

In economics, hedonic regression, also sometimes called hedonic demand theory, is a revealed preference method for estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value for each. This requires that the composite good can be reduced to its constituent parts and that those resulting parts are in some way valued by the market. Hedonic models are most commonly estimated using regression analysis, although some more generalized models such as sales adjustment grids are special cases which do not.

David William Pearce OBE was Emeritus Professor at the Department of Economics at University College London (UCL). He specialised in, and was a pioneer of, environmental economics, having published over fifty books and over 300 academic articles on the subject, including his 'Blueprint for a Green Economy' series.

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing to pay or receive to effect a sale of the business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest.

<span class="mw-page-title-main">Shadow price</span> Term in economics

A shadow price is the monetary value assigned to an abstract or intangible commodity which is not traded in the marketplace. This often takes the form of an externality. Shadow prices are also known as the recalculation of known market prices in order to account for the presence of distortionary market instruments. Shadow prices are the real economic prices given to goods and services after they have been appropriately adjusted by removing distortionary market instruments and incorporating the societal impact of the respective good or service. A shadow price is often calculated based on a group of assumptions and estimates because it lacks reliable data, so it is subjective and somewhat inaccurate.

The embedding effect is an issue in environmental economics and other branches of economics where researchers wish to identify the value of a specific public good using a contingent valuation or willingness-to-pay (WTP) approach. The problem arises because public goods belong to society as a whole, and are generally not traded in the market. Because market prices cannot be used to value them, researchers ask a sample of people how much they are willing to pay for the public good, wildlife preservation for example. The results can be misleading because of the difficulty, for individual society members, of identifying the particular value that they attach to one particular thing which is embedded in a collection of similar things. A similar problem occurs with a wider selection of public goods. The embedding 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.

The sales comparison approach (SCA) is a real estate appraisal valuation method that relies on the assumption that a matrix of attributes or significant features of a property drive its value. For examples, in the case of a single family residence, such attributes might be floor area, views, location, number of bathrooms, lot size, age of the property and condition of property. This method is in contrast to the two other main pricing methods for real estate which are cost approach and income approach.

The travel cost method of economic valuation, travel cost analysis, or Clawson method is a revealed preference method of economic valuation used in cost–benefit analysis to calculate the value of something that cannot be obtained through market prices. The aim of the method is to calculate willingness to pay for a constant price facility. The technique was first suggested by the statistician Harold Hotelling in a 1947 letter to the director of the National Park Service of the United States for a method to measure the benefit of National Parks to the public. The method was further refined by Trice and Wood (1958) and Clawson (1959). The technique is one approach to the estimation of a shadow price.

<span class="mw-page-title-main">Environmental good</span> Non-market public goods

Environmental goods are typically non-market goods, including clean air, clean water, landscape, green transport infrastructure, public parks, urban parks, rivers, mountains, forests, and beaches. Environmental goods are a sub-category of public goods. Concerns with environmental goods focus on the effects that the exploitation of ecological systems have on the economy, the well-being of humans and other species, and on the environment. Users not having to pay an upfront cost and external factors like pollution that can damage environmental goods indefinitely are some of the challenges in protecting environmental goods.

Non-use value is the value that people assign to economic goods even if they never have and never will use it. It is distinguished from use value, which people derive from direct use of the good. The concept is most commonly applied to the value of natural and built resources.

Richard Taylor Carson is a professor of economics at the University of California, San Diego. He obtained a B.A. degree from Mississippi State University in 1977, an M.A. in international affairs from George Washington University in 1979, and an M.A. in statistics and a Ph.D. in agricultural and resource economics from the University of California, Berkeley, in 1985. He is the author or editor of eight books and over a hundred journal articles, with over 4000 citations to his works.

<span class="mw-page-title-main">Barbara Baarsma</span> Dutch economist and university teacher

Barbara Elisabeth Baarsma is a Dutch economist, and Professor of Market Forces and Competition Issues at the University of Amsterdam.

<span class="mw-page-title-main">W. Michael Hanemann</span> American economist

William Michael Hanemann is an economist who is a major academic contributor to the fields of environmental and resource economics. Hanemann is currently Julie A. Wrigley Professor at the School of Sustainability and Department of Economics of Arizona State University. He has been married to Mary Hanemann for more than four decades.

Thomas Harry (Tom) Tietenberg is an American economist and environmentalist, and Emeritus Professor at Colby College, known for his work in the field of resource-based economy.

<span class="mw-page-title-main">Clive Spash</span> Ecological economist

Clive L. Spash is an ecological economist. He currently holds the Chair of Public Policy and Governance at Vienna University of Economics and Business, appointed in 2010. He is also Editor-in-Chief of the academic journal Environmental Values.

Susana Mourato is a professor of environmental economics at the London School of Economics and Political Science. She holds a leader position at the Grantham Research Institute on Climate Change and the Environment.

<span class="mw-page-title-main">Natural resource valuation</span> Concept of natural resource economics

Natural resource valuation is a process of providing of benefits, costs, damage of or to natural and environmental resources. It has a fundamental role in the practice of cost-benefit analysis of health, safety, and environmental issues.

References

  1. ↑ Davis, Robert (1963). "Recreation planning as an economic problem".
  2. ↑ Mitchell, Robert Cameron (2013-10-18). Using Surveys to Value Public Goods. doi:10.4324/9781315060569. ISBN   9781315060569.
  3. ↑ Diamond, Peter A.; Hausman, Jerry A. (1994). "Contingent Valuation: Is Some Number better than No Number?". Journal of Economic Perspectives . 8 (4): 45–64. doi: 10.1257/jep.8.4.45 . JSTOR   2138338.
  4. 1 2 3 Hein, Lars (2010). Economics and Ecosystems Efficiency, Sustainability and Equity in Ecosystem Management. Cheltenham, UK • Northampton, MA, USA: Edward Elgar. ISBN   978-1-84844-065-4. LCCN   2009942849.
  5. 1 2 3 Onstad, David W.; Crain, Philip R. (2019). The Economics of Integrated Pest Management of Insects. Boston, MA, USA Wallingford, Oxfordshire, UK: CABI (Centre for Agriculture and Bioscience International). ISBN   978-1-78639-367-8. LCCN   2019016878. ISBN   978 1 78639 368 5. ISBN   978 1 78639 369 2.
  6. 1 2 3 Mander, Ülo; Wiggering, Hubert; Helming, Katharina, eds. (2007). Multifunctional Land Use Meeting Future Demands for Landscape Goods and Services. Springer Berlin Heidelberg New York. ISBN   978-3-540-36762-8. LCCN   2007921526..
  7. ↑ See, for example, Robert Simons and Kimberly Winson-Geideman, Determining Market Perceptions On Contaminated Residential Property Buyers Using Contingent Valuation Surveys, Journal of Real Estate Research 27-2, 2005, pgs 193-220
  8. ↑ See, for example, Bill Mundy and Dave McLean, The Addition of Contingent Valuation and Conjoint Analysis to the Required Body of Knowledge for the Estimation of Environmental Damage to Real Estate, The Journal of Real Estate Practice and Education, 1998, "Archived copy" (PDF). Archived from the original (PDF) on 2007-10-10. Retrieved 2007-06-30.{{cite web}}: CS1 maint: archived copy as title (link)
  9. ↑ Dave McLean, Bill Mundy, and John A. Kilpatrick, Summation of Evidentiary Rules for Real Estate Experts Mandated by Daubert v. Merrill Dow Pharmaceuticals, Real Estate Issues, 1999, "Archived copy" (PDF). Archived from the original (PDF) on 2007-04-13. Retrieved 2007-06-30.{{cite web}}: CS1 maint: archived copy as title (link)
  10. ↑ Shari S. Diamond, Reference Guide on Survey Research (2nd), Reference Manual on Scientific Evidence, Federal Judicial Center, 2000
  11. ↑ Carson, Richard T.; Wilks, Leanne; Imber, David (1994). "Valuing the Preservation of Australia's Kakadu Conservation Zone". Oxford Economic Papers. 46 (Special Issue on Environmental Economics): 727–749. doi:10.1093/oep/46.Supplement_1.727. JSTOR   2663496.
  12. ↑ Kilpatrick, John A., Valuation of Brownfields, Chapter 29 in Lexis-Nexis Matthew Bender's Brownfield Law and Practice, 2007
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.