The Suitability of the Contingent Valuation Method for Determining Estimates of Environmental Damage

8/8/2019 The Suitability of the Contingent Valuation Method for Determining Estimates of Environmental Damage

1/9

862746

The suitability of the Contingent Valuation method for determining

estimates of environmental damage

The contingent valuation (CV) method itself is a survey approach designed essentially to

create the missing market for public goods. This is achieved by determining what people

would be willing to pay (WTP) for specified changes in the quantity or quality of such goods,

or what they would be willing to accept (WTA) in compensation for well-specified

degradations in the provision of these goods. It is often very difficult to determine the worth

of an environmental service. Therefore, CV methods are useful in the absence of price

information and of competitive markets. As people inherently dont reveal their WTP for the

environmental benefits through their behaviour asking them questions is the only option for

estimating a monetary value.

Perhaps the most prominent example to date of the CV method is the natural resource

damage assessment after the Exxon Valdez oil spill in the open waters of the Prince William

Sound. On the night of 24 March 1989, the Exxon Valdez left the port of Valdez. Its crew

failed to realise how far off the shipping lanes the tanker had strayed. Oil compartments

ruptured, which in turn released 11 million gallons of crude oil into the Prince William

Sound. Teams of economists used the CV method to estimate the economic damages that

rouse from the spill. These teams reported a lower bound estimate on the WTP to prevent

another spill similar to Valdez at $2.8 billion with a mean estimate of $7.2 billion. The major

objective of this essay is to discuss in detail the methodological weaknesses of the CV

method, culminating in a conclusion to a similar question proposed by the NOAA after the


2/9

862746

results the teams of economists reported from the Exxon Valdez oil disaster: Is CV a valid

method for determining the lost economic value for natural resource damages?1

The rationale for the introduction of CV method is that the old resource management

paradigm had consequently produced social penalties and externalities. The traditional

resource management that had been mostly based on market benefits as the fundamental

component in the benefit cost analysis for policy making proved to be unsustainable in the

long term. Therefore the integrity of our surrounding environment had been severely

damaged. Acid rain, ozone depletion etc. have resulted from the negative impacts of human

activities on the environment. Such undoable consequences have prompted others to find an

alternative approach to manage our remaining resources more efficiently. Numerous

environmental economic philosophies emerged as possible methods for decision making

about resource management. The CV method was the most prominent one. The main

attribution of the CV method is it allows the non-market value of resources to be incorporated

in the decision making process. Indeed the environment is invaluable to us. One may argue

that the CV method does not place a value on our ecosystem but rather attribute a cost to the

potential economic regulations and programmes that may have a significant impact on our

ecosystem.

Although the CV method has been widely used for the past 2 years, there are methodological

weaknesses and issues surrounding it. The fact that the CV method is actually based on

asking people questions rather than observing their behaviour raises enormous controversy.

The practical, empirical and conceptual issues linked with developing monetary estimates of

1

Tim Haab. (2005). Measuring the Value of the Environment: The Contingent ValuationMethod. Available: http://www.env-econ.net/2005/11/measuring_the_v.html. Lastaccessed 24th April 2009.


3/9

862746

economic values on the basis of how individuals respond to hypothetical questions about

hypothetical market situations are constantly debated.

The nature of the market that is created in a CV method survey is mainly hypothetical and

would potentially attract a biased referred to as hypothetical bias. Such a bias refers to the

difference between real and hypothetical payments. This is the most technique specific

problem facing the CV method studies. It is said to arise if respondents WTP in the

hypothetical setting of the CV method is markedly different to their true WTP. Many CV

studies have reported that the hypothetical WTP are actually greater than the real WTP

values. In a study by Seip and Strand (1992)hypothetical WTP value was elicited from a

sample group for a membership fee for a Norwegian environmental organisation 2. This group

was the subsequently asked to make an actual payment, the results found that the hypothetical

WTP value was in fact greater than the actual contribution. Many commentators are firmly

convinced that the use of hypothetical markets instead of real markets can in certain instances

produce its own distinct bias problems.Surveys of experimental tests support the notion that

although hypothetical bias is a significant problem in WTA format studies, it can actually be

reduced to and insignificant level in WTP format studies. In order to reduce the problem of

any potential difference between hypothetical and actual WTP, it is important that

respondents find the hypothetical market to be as realistic as possible.

Possibly the most important internal argument against the reliability of the CV method is the

observation of the embedding occurrence. Embedding refers to a phenomenon in which a

wide range of variation is found to occur in WTP value for the same good depending on

whether the good is valued on its own or valued as a part of a more inclusive package

2

L. Venkatachalam. (2004). The contingent valuation method: a review. Available:sard.ruc.edu.cn/zengyinchu/files/paper/The_contingent_valuation_method-_a_review.pdf.Last accessed 24 April 2009.


4/9

862746

(Kahneman and Knestch, 1992)3.According to Kahneman and Knestch (1992), the

embedding occurs if the same good is assigned a lower value if WTP for it is inferred from

WTP for a more inclusive good rather than if the particular good is evaluated on its own.

The scope effect or part whole bias occurs when respondents confuse the asset in question

with other wider issues they associate with the asset. Mental account problems can arise if

respondents ignore the calls upon their income made by other environmental goods. As a

result a respondent could pledge more than their entire income. For instance they may

mentally allocate a proportion of their budget for species conservation. An ordering effect

occurs when a good will elicit a higher WTP response if it is placed at the top of a list of

goods to be evaluated, than if it is valued after other goods. If a survey reveals a true value, it

shouldnt matter whether the question is asked by itself or with other questions, nor what the

ordering of the questions is.

The survey design is also a methodological weakness of the CV method. There are several

ways in which the design can have an effect on the results obtained. It has been claimed that

the choice of payment vehicle can affect the stated level of WTP. For instance a study by

Rowe, d'Arge and Brookshire4(1980) found that WTP to preserve landscape quality was

higher when an income tax increase was suggested than when an entrance fee was proposed

concluding that respondents viewed fee-paying as a debasement of the experience.

Furthermore, it has also been claimed that the types of questions used in the questionnaire can

influence the mean WTP. In a recent CV method study regarding WTP for the Norfolk

Broads, a comparison was made between the percentage of respondents in each dichotomous

choice (DC) bid category stating that they would be WTP the bid level asked, and the

3 L. Venkatachalam. (2004). The contingent valuation method: a review. Available:sard.ruc.edu.cn/zengyinchu/files/paper/The_contingent_valuation_method-_a_review.pdf.Last accessed 24 April 2009.4

Bateman, I, Turner, K. (1992). Evaluation of the Environment: The Contingent ValuationMethod. Available: http://www.uea.ac.uk/env/cserge/pub/wp/gec/gec_1992_18.htm. Lastaccessed 25th April 2009.


5/9

862746

percentage of respondents in the open-ended experiment who had stated at WTP of greater

than or equal to the dichotomous bid level. The following table illustrates the results of these

comparisons across the full range of dichotomous bids5.

When using open ended questions in the form of a bidding game or using payment cards, the

suggested bid levels may significantly affect the mean WTP. Studies have noticed that the

suggestion of such an initial starting point can significantly influence the final bid. Even

though using starting points could potentially reduce non-response and variance in open-

ended questionnaires, its argued that the statistically observable bias this induces indicates

5

Bateman, I, Turner, K. (1992). Evaluation of the Environment: The Contingent ValuationMethod. Available: http://www.uea.ac.uk/env/cserge/pub/wp/gec/gec_1992_18.htm. Lastaccessed 25th April 2009.


6/9

862746

that such 'bidding-hints' lead respondents to take short-cuts to arrive at a decision rather than

thinking seriously about their true WTP6.

Another problem of CV studies is strategic bias, of which there are two forms; free riding and

over pledging. Strategic bias arises when the respondent provides a biased answer in order to

influence a particular outcome. If respondents believe that bids will actually be collected they

may understate their true WTP for a welfare improving change as environmental goods are

often non-excludable in consumption, this is the free rider problem. Over pledging occurs

when a respondent assumes their stated WTP value could influence the provision of the good

under question, providing the stated WTP doesnt form any basis for the future pricing

policy.

Warm glow refers to the moral satisfaction that individuals feel when they make a charitable

donation. Critics of the CV method, such as Diamond and Hausmann observed that the

distribution of responses to open ended questions about WTP is bi-modal. This observation

led the critics to conclude that individuals responses to CV questions serve the exact same

contribution as charitable contributions, as in not only to support the charity but to also feel

the warm glow that comes with donating to charities. Its argued that individuals will state an

unrealistically large WTP in order to derive the pleasure of giving, which doesnt actually

reflect the true value. If this is the case CV responses shouldnt be taken as reliable estimates

of a true WTP, but rather as an indicative of approval for the environmental programme in

question7.

6 Bateman, I, Turner, K. (1992). Evaluation of the Environment: The Contingent ValuationMethod. Available: http://www.uea.ac.uk/env/cserge/pub/wp/gec/gec_1992_18.htm. Lastaccessed 25th April 2009.7

Kenneth Arrow, Robert Solow, Paul R. Portney, Edward E. Leamer, Roy Radner, HowardSchuman. (1993). Report of the NOAA Panel on Contingent Valuation. Available:www.darrp.noaa.gov/library/pdf/cvblue.pdf. Last accessed 25th April 2009.


7/9

862746

Critics of the CV method have persistently cited the empirical asymmetry of WTA over

WTP sums as evidence of the unreliability of the method8 Even though both the WTA and

the WTP should be comparable, the WTA often exceeds the WTP. Hanley and Spash

provided 2 reasons for this. Firstly, WTA is greater than WTP because of loss aversion,

where individuals value a given reduction in entitlements more highly than an equivalent

increase in entitlements. This was proved by Brookshire and Coursey (1987)9who found in a

hypothetical experiment that the respondents WTA value for a particular level of reduction

in an area with tree cover was 75 times greater than the WTP value for the same level of

expansion in the same area. Secondly, income constrains WTP, while WTA is unconstrained.

The fact that CV is based on what people say they would do, as opposed to what people are

observed to do, is the source of its greatest strengths and weaknesses. The CV method is an

integral part of environmental assessment of developmental and basic infrastructural projects.

It has the potential for application of environmental goods than any other monetary valuation

technique. It poses strong theoretical basis, with the advantage that it estimates income

compensated welfare measures. Although the CV method has methodological weaknesses, it

is a promising method and could be used to derive useful information. In the words of

Carson, even if all the survey related issues to valuating a public good can be overcome, CV

is not without limitations10.

8 Bateman, I, Turner, K. (1992). Evaluation of the Environment: The Contingent ValuationMethod. Available: http://www.uea.ac.uk/env/cserge/pub/wp/gec/gec_1992_18.htm. Lastaccessed 25th April 2009.9 L. Venkatachalam. (2004). The contingent valuation method: a review. Available:sard.ruc.edu.cn/zengyinchu/files/paper/The_contingent_valuation_method-_a_review.pdf .Last accessed 24 April 2009.10

L. Venkatachalam. (2004). The contingent valuation method: a review. Available:sard.ruc.edu.cn/zengyinchu/files/paper/The_contingent_valuation_method-_a_review.pdf .Last accessed 24 April 2009.


8/9

862746

In the case of the Exxon Valdez oil spill, the US government settled their lawsuit against

Exxon for $1billion, additionally Exxon spent over $2billion on oil spill response and

restoration. A comparison to the $2.8billion to prevent such a spill put forth in the original

study report, evidence that CV method can be used in a court of law.

Subsequent to the Exxon Valdez incident the NOAA released a set of guidelines for the use

of CV method that included: Clear reporting, of defined population, sampling method, non-

response rate and composition, wording of questionnaire and communications; Careful pre-

testing of CV questionnaire and using WTP format instead of WTA.

Since non-use values are significant, and few people actually visit the site, other methods,

such as the travel cost method, will underestimate the benefits of preserving the site. In this

case, contingent choice methods might also be used, depending on the questions that must be

answered, and whether contingent choice question formats are more effective than standard

contingent valuation questions. This would be decided in the survey development stage of the

application11.

In answering the question posed by the NOAA in the introduction, the members of the panel

concluded that the CV method can produce reliable estimates of the cost value resulting from

natural resource damages provided that researcher meet a high standard of proof12. The

problem lies in meeting this standard.

11 Smith, A. (2006). Contingent Valuation Method. Available:http://www.ecosystemvaluation.org/contingent_valuation.htm. Last accessed 24th April2009.12

Tim Haab. (2005). Measuring the Value of the Environment: The Contingent ValuationMethod. Available: http://www.env-econ.net/2005/11/measuring_the_v.html. Lastaccessed 24th April 2009.


9/9

862746

Documents

The Suitability of the Contingent Valuation Method for Determining Estimates of Environmental Damage