Contingent Valuation Method

The Contingent Valuation Method (CVM) is an economic, non-market based valuation method especially used to infer individual’s preferences for public goods, notably environmental quality. For this same reason, CVM is known in the literature by exploring the use of questionnaires and asking directly consumers, i.e. respondents, for their maximum willingness to pay (WTP) for specified improvements in the environmental quality, including protection of marine biodiversity. In short, CVM circumvents the absence of markets for public goods by presenting consumers with a survey market in which they have the opportunity to buy the good in question – protection of marine biodiversity. Because the elicited WTP values are contingent upon the market described to the respondents, this approach came to be called the contingent valuation method. The survey market is should be modelled after a political market, notably in a referendum format. In other words, respondents should be asked how they would vote (favour or against) upon a described marine environmental protection program, taking into account that its approval would imply the payment of a tax. For each if the protection program refers to the introduction of a ballast water treatment complex in the European harbours one could model the WTP question as follows: “If the total tax amount to be paid for the water treatment complex was 30 Euro per year for the next 2 years, and thus keeping European coast free from exotic algae and the beaches free from algae foams, how would you vote on the introduction this tax?” Bearing in mind the answer of the respondents to this question and the use of appropriated econometric tools, economists are able assess the individual demand for environmental quality and thus quantify in monetary terms the underlying welfare changes. The typical CVM survey consists of three sections. The first section is characterized by the description of the environmental change as conveyed by the policy formulation and the description of the contingent market. The policy formulation involves describing the availability (or quality) of the environmental commodity in both the ‘reference state’ (usually the status quo) and ‘target state’ (usually depicting the policy action). Since all monetary transactions occur in a social context, it is also crucial to define the contingent market - most of the time rather unfamiliar to the respondents - by stating to the respondent both the rules specifying the conditions that would lead to policy implementation as well the payment to be exacted from the respondent’s household in the event of policy implementation. The second section is where the respondent is asked to state her monetary valuation for the described policy formulation. This part is the core of the questionnaire. The major objective of this section is to obtain a monetary measure of the maximum willingness to pay that the individual consumers are willing to pay for the described environmental policy action. The third section of the CVM instrument is a set of questions that collect socio-demographic information about the respondents. The answers to these questions help to better characterise the respondent’s profile and are used to understand the respondent’s stated WTP responses. The third section finishes with follow-up questions. The follow-up questions are answered by the interviewers. The goal is to assess whether the respondents have (well) understood the CVM survey in general, and the valuation question in particular (see brief history for more details on the practice of this method).

Today, the CVM is one of the most used techniques for valuation of environmental benefits, widely used by academic institutions as well as by governmental agencies as a crucial tool in cost-benefit analysis and damage cost assessment (see NOAA Panel for more technical details on how to construct an efficient survey). This is partly due to the advantages of CVM compared to other valuation methods. First, the CVM method gives immediately a monetary assessment of respondents’ preferences. Second, the CVM method is the only valuation technique that is capable of shedding light on the monetary valuation of the non-use values, i.e., the benefit value component of the environmental commodity that is not directly associated with its direct use or consumption. These values are characterized by having no behavioral market trace. Therefore, economists cannot glean information about these values relying on market-based valuation approaches. For environmental resources such as the protection of natural parks or biodiversity sensitive areas, which play an important role in guaranteeing the protection of local wildlife diversity, the nonuse value component may account for the major part of the conservation benefits. Ignoring such values will be responsible for a systematic bias in the estimation (an underestimation) of the total economic value of the related environmental. Third, CVM brings with it the advantage that environmental quality changes may be valued even if they have not yet occurred (ex ante valuation). This implies that the CVM can be a useful advisory tool for policy decision-making. Furthermore, the constructed nature of the CVM method permits to value environmental changes even if they have not yet occurred. Therefore, CVM offers a greater potential scope and flexibility than the revealed preference methods since it is possible to specify different states of nature (policy scenarios) that may even lie outside the current institutional arrangements or levels of provision.

Further reading

Carson, R. T., R. C. Mitchell, W. M. Hanemann, R. J. Kopp, S. Presser and P. A. Ruud (1992) “A Contingent Valuation Study of Lost Passive Use Values Resulting from the Exxon Valdez Oil Spill”, Report prepared for the Attorney General of the State of Alaska, Washington. (Carson et al. 1992)

Ciriacy-Wantrup (1947) “Capital Returns from Soil Conservation Practices”, Journal of Farms Economics, 29, 1180-1190.

Diamond, P.A and J. A. Hausman (1994) “Contingent Valuation: Is Some Number better than No Number?”, The Journal of Economic Perspectives, Vol. 8, No. 4, pp. 45-64

Mitchell, R. C. and R. T. Carson (1989) “Using Surveys to Value Public Goods. The Contingent Valuation Method”, Washington DC, Resources for the Future.

NOAA – National Oceanic and Atmospheric Administration (1993) “Report of the NOAA Panel on Contingent Valuation”, Federal Register, Vol 58, no. 10, US, 4601-4614.

Nunes, P.A.L.D. and A. de Blaeij (2005) “Economic Assessment of Marine Quality Benefits: Applying the Use of Non-Market Valuation Methods”, in Maes, Frank (Ed.), Marine Resource Damage Assessment, Liability and Compensation for Environmental Damage, Chapter 7, Springer Publishers, Amsterdam, The Netherlands.

Nunes, P.A.L.D. and J.C.J.M. van den Bergh (2004) “Valuing non-market benefits for protection against exotic marine species in the Netherlands using TC and CV data”, Environment and Resource Economics, 28, pp. 517-532.

Nunes, P.A.L.D. and P. Nijkamp (2007) “Contingent Valuation Method” in M. Deakin, G. Mitchell, P. Nijkamp and R. Vreeker (Eds.), Sustainable Urban Development (Volume 2): The Environmental Assessment Methods, Chapter 8, Routledge, UK.

P.A.L.D. Nunes (2002) “The Contingent Valuation of Natural Parks: Assessing the Warmglow Propensity Factor” Edward Elgar Publishing (UK), New Horizons in Environmental Economics Series.

Nunes, P.A.L.D. and E. Schokkaert (2003) “Identifying the warm glow effect in contingent valuation”, Journal of Environmental Economics and Management, vol. 45, 231-245.

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