Difference between revisions of "Contingent Valuation Method"
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==A brief history on contingent valuation== | ==A brief history on contingent valuation== | ||
The first CVM published reference dates from 1947. We refer to the Ciriacy-Wantrup<ref>Ciriacy-Wantrup (1947) “Capital Returns from Soil Conservation Practices”, Journal of Farms Economics, 29, 1180-1190.</ref> article published in the Journal of Farms Economics. The study focuses on the valuation of the economic effects of preventing soil erosion. The author suggested that one way to obtain information on the demand for these favourable effects would be to ask directly the individuals how much they would be willing to pay for successive increments. However, no empirical valuation was attempted. However, the first CVM design and implementation only occurs two decades later when Robert Davis assessed the economic value of the recreational possibilities of the Maine Woods by exploring the survey technique (Davis 1963<ref>DAVIS, Robert K. (1963)"The Value of Outdoor Recreation: An Economic Study of the Maine Woods" Ph.D. dissertation. Harvard University</ref>). Davis simulated a market behavior situation by putting the interviewer in the “position of a seller who elicits the highest possible bid from the users of the services being offered”. | The first CVM published reference dates from 1947. We refer to the Ciriacy-Wantrup<ref>Ciriacy-Wantrup (1947) “Capital Returns from Soil Conservation Practices”, Journal of Farms Economics, 29, 1180-1190.</ref> article published in the Journal of Farms Economics. The study focuses on the valuation of the economic effects of preventing soil erosion. The author suggested that one way to obtain information on the demand for these favourable effects would be to ask directly the individuals how much they would be willing to pay for successive increments. However, no empirical valuation was attempted. However, the first CVM design and implementation only occurs two decades later when Robert Davis assessed the economic value of the recreational possibilities of the Maine Woods by exploring the survey technique (Davis 1963<ref>DAVIS, Robert K. (1963)"The Value of Outdoor Recreation: An Economic Study of the Maine Woods" Ph.D. dissertation. Harvard University</ref>). Davis simulated a market behavior situation by putting the interviewer in the “position of a seller who elicits the highest possible bid from the users of the services being offered”. | ||
| − | Since these early beginnings, the CVM has been used to measure benefits of a wide range of environmental goods including recreation, amenity value, scenery, forests, wetlands, wildlife, air and water quality. More recently, there has been a trend to conduct CVM studies not only to value environmental goods, but also to investigate the various methodological issues involved in the valuation exercise, including the study of the impact of consumer’s attitudes, motivations on CVM estimates. Furthermore, throughout these decades, the CVM has gone through several phases, emerging from the academy into the rough and tumble of the outside world. Strong development stimulus was given by the Reagan Executive Order 12291, introduced in 1981; the re-interpretation of CERCLA, in 1989; the Exxon Valdez damage assessment, in 1992, and, more recently, the NOAA panel<ref>NOAA – National Oceanic and Atmospheric Administration (1993) “Report of the NOAA Panel on Contingent Valuation”, Federal Register, Vol 58, no. 10, US, 4601-4614.</ref | + | Since these early beginnings, the CVM has been used to measure benefits of a wide range of environmental goods including recreation, amenity value, scenery, forests, wetlands, wildlife, air and water quality. More recently, there has been a trend to conduct CVM studies not only to value environmental goods, but also to investigate the various methodological issues involved in the valuation exercise, including the study of the impact of consumer’s attitudes, motivations on CVM estimates. Furthermore, throughout these decades, the CVM has gone through several phases, emerging from the academy into the rough and tumble of the outside world. Strong development stimulus was given by the Reagan Executive Order 12291, introduced in 1981; the re-interpretation of CERCLA, in 1989; the Exxon Valdez damage assessment, in 1992, and, more recently, the NOAA panel<ref>NOAA – National Oceanic and Atmospheric Administration (1993) “Report of the NOAA Panel on Contingent Valuation”, Federal Register, Vol 58, no. 10, US, 4601-4614.</ref>. |
The Reagan Executive Order 12291, introduced in 1981, constitutes a strong stimulus for the development of the monetary valuation methods of environmental commodities. In concrete terms, the Executive Order stipulated that all federal regulations on environmental policy should be submitted to a cost-benefit analysis. All regulations, including both the promulgation of new regulations and the review of the existing ones, would only be carried out if a positive present value for the society could be achieved. Therefore, the social benefits had to be monetized. The flexibility and generality of CVM’s application was the main reason why this valuation method received most of the EPA’s “demands” in the monetary assessment of the social costs and benefits associated with the new regulations on environmental policy. Thus, the appearance of Executive Order 12291 had a major impact in the development of the CVM. Furthermore, the District of Columbia Court of Appeals re-interpretation in 1989 of the US Comprehensive Environmental Response, Compensation and Liability Act of 1980 (USDI 1989) expressed not only the legitimacy of non-use values as a component of the total resource value, but also granted equal standing to stated and revealed preferences evaluation techniques. Such a governmental decision was responsible for the expansion of the CVM beyond the academic world, now fully recognized as a fair, conventional method to shed light on the economic value of environmental quality, corner stone of an efficient, well accepted policy design. | The Reagan Executive Order 12291, introduced in 1981, constitutes a strong stimulus for the development of the monetary valuation methods of environmental commodities. In concrete terms, the Executive Order stipulated that all federal regulations on environmental policy should be submitted to a cost-benefit analysis. All regulations, including both the promulgation of new regulations and the review of the existing ones, would only be carried out if a positive present value for the society could be achieved. Therefore, the social benefits had to be monetized. The flexibility and generality of CVM’s application was the main reason why this valuation method received most of the EPA’s “demands” in the monetary assessment of the social costs and benefits associated with the new regulations on environmental policy. Thus, the appearance of Executive Order 12291 had a major impact in the development of the CVM. Furthermore, the District of Columbia Court of Appeals re-interpretation in 1989 of the US Comprehensive Environmental Response, Compensation and Liability Act of 1980 (USDI 1989) expressed not only the legitimacy of non-use values as a component of the total resource value, but also granted equal standing to stated and revealed preferences evaluation techniques. Such a governmental decision was responsible for the expansion of the CVM beyond the academic world, now fully recognized as a fair, conventional method to shed light on the economic value of environmental quality, corner stone of an efficient, well accepted policy design. | ||
Another important benchmark in the history of the CVM is the massive oil spill due to the grounding of the oil tanker Exxon Valdez in the Prince William Sound in the Northern part of the Gulf of Alaska on March 24, 1989. This oil spill was the largest oil spill from a tanker in US history: more than 1,300 kilometres of coastline were affected and almost 23,000 birds were killed. After the oil spill, the State of Alaska commissioned various studies to identify the physical damage to the natural resources. The follow-up economic damage assessment studies also take into account, in addition to water purification costs, economic losses such as the decrease in revenue from recreation and fisheries. Moreover, the State of Alaska appointed an interdisciplinary group of researchers to design and implement a national CVM study to measure the loss of nonuse values to US citizens as a result of the oil spill. This study was coordinated by Richard Carson and constitutes one of the major contingent valuation applications and represents an important methodological reference for all contingent valuation researchers' work. The loss of nonuse values resulting from the Exxon Valdez oil spill was estimated at 2,8 billion dollars. | Another important benchmark in the history of the CVM is the massive oil spill due to the grounding of the oil tanker Exxon Valdez in the Prince William Sound in the Northern part of the Gulf of Alaska on March 24, 1989. This oil spill was the largest oil spill from a tanker in US history: more than 1,300 kilometres of coastline were affected and almost 23,000 birds were killed. After the oil spill, the State of Alaska commissioned various studies to identify the physical damage to the natural resources. The follow-up economic damage assessment studies also take into account, in addition to water purification costs, economic losses such as the decrease in revenue from recreation and fisheries. Moreover, the State of Alaska appointed an interdisciplinary group of researchers to design and implement a national CVM study to measure the loss of nonuse values to US citizens as a result of the oil spill. This study was coordinated by Richard Carson and constitutes one of the major contingent valuation applications and represents an important methodological reference for all contingent valuation researchers' work. The loss of nonuse values resulting from the Exxon Valdez oil spill was estimated at 2,8 billion dollars. | ||
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===References=== | ===References=== | ||
<references/> | <references/> | ||
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===Further reading=== | ===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) | :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) | ||
Revision as of 14:04, 25 September 2007
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.
A brief history on contingent valuation
The first CVM published reference dates from 1947. We refer to the Ciriacy-Wantrup[1] article published in the Journal of Farms Economics. The study focuses on the valuation of the economic effects of preventing soil erosion. The author suggested that one way to obtain information on the demand for these favourable effects would be to ask directly the individuals how much they would be willing to pay for successive increments. However, no empirical valuation was attempted. However, the first CVM design and implementation only occurs two decades later when Robert Davis assessed the economic value of the recreational possibilities of the Maine Woods by exploring the survey technique (Davis 1963[2]). Davis simulated a market behavior situation by putting the interviewer in the “position of a seller who elicits the highest possible bid from the users of the services being offered”. Since these early beginnings, the CVM has been used to measure benefits of a wide range of environmental goods including recreation, amenity value, scenery, forests, wetlands, wildlife, air and water quality. More recently, there has been a trend to conduct CVM studies not only to value environmental goods, but also to investigate the various methodological issues involved in the valuation exercise, including the study of the impact of consumer’s attitudes, motivations on CVM estimates. Furthermore, throughout these decades, the CVM has gone through several phases, emerging from the academy into the rough and tumble of the outside world. Strong development stimulus was given by the Reagan Executive Order 12291, introduced in 1981; the re-interpretation of CERCLA, in 1989; the Exxon Valdez damage assessment, in 1992, and, more recently, the NOAA panel[3]. The Reagan Executive Order 12291, introduced in 1981, constitutes a strong stimulus for the development of the monetary valuation methods of environmental commodities. In concrete terms, the Executive Order stipulated that all federal regulations on environmental policy should be submitted to a cost-benefit analysis. All regulations, including both the promulgation of new regulations and the review of the existing ones, would only be carried out if a positive present value for the society could be achieved. Therefore, the social benefits had to be monetized. The flexibility and generality of CVM’s application was the main reason why this valuation method received most of the EPA’s “demands” in the monetary assessment of the social costs and benefits associated with the new regulations on environmental policy. Thus, the appearance of Executive Order 12291 had a major impact in the development of the CVM. Furthermore, the District of Columbia Court of Appeals re-interpretation in 1989 of the US Comprehensive Environmental Response, Compensation and Liability Act of 1980 (USDI 1989) expressed not only the legitimacy of non-use values as a component of the total resource value, but also granted equal standing to stated and revealed preferences evaluation techniques. Such a governmental decision was responsible for the expansion of the CVM beyond the academic world, now fully recognized as a fair, conventional method to shed light on the economic value of environmental quality, corner stone of an efficient, well accepted policy design. Another important benchmark in the history of the CVM is the massive oil spill due to the grounding of the oil tanker Exxon Valdez in the Prince William Sound in the Northern part of the Gulf of Alaska on March 24, 1989. This oil spill was the largest oil spill from a tanker in US history: more than 1,300 kilometres of coastline were affected and almost 23,000 birds were killed. After the oil spill, the State of Alaska commissioned various studies to identify the physical damage to the natural resources. The follow-up economic damage assessment studies also take into account, in addition to water purification costs, economic losses such as the decrease in revenue from recreation and fisheries. Moreover, the State of Alaska appointed an interdisciplinary group of researchers to design and implement a national CVM study to measure the loss of nonuse values to US citizens as a result of the oil spill. This study was coordinated by Richard Carson and constitutes one of the major contingent valuation applications and represents an important methodological reference for all contingent valuation researchers' work. The loss of nonuse values resulting from the Exxon Valdez oil spill was estimated at 2,8 billion dollars. However, and anticipating these high financial consequences, Exxon commissioned a group of researchers to verify whether nonuse values could be accurately measured by means of CVM. The main argument of critics of CVM is that this method is not capable of resulting in valid and reliable monetary measures of nonuse values. Hausman’s well-know argument “is some number better than no number” fully expresses the scepticism toward the CVM method. Therefore, according to Hausman, assessments of lost nonuse values by means of the CVM method should not be used in court. In order to address Hausman’s critique, National Oceanic and Atmospheric Administration set a group of experts in order to evaluate the reliability of the use of CVM in the natural resource damage assessments.
References
- ↑ Ciriacy-Wantrup (1947) “Capital Returns from Soil Conservation Practices”, Journal of Farms Economics, 29, 1180-1190.
- ↑ DAVIS, Robert K. (1963)"The Value of Outdoor Recreation: An Economic Study of the Maine Woods" Ph.D. dissertation. Harvard University
- ↑ NOAA – National Oceanic and Atmospheric Administration (1993) “Report of the NOAA Panel on Contingent Valuation”, Federal Register, Vol 58, no. 10, US, 4601-4614.
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)
- 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.
- 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.
- Nunes, P.A.L.D. (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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