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 A brief history of contingent valuation 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 of contingent valuation

The NOAA Panel

A panel of experts, with the Nobel Laureates Kenneth Arrow and Robert Solow as chairmen, provided advice to the National Oceanic and Atmospheric Administration, NOAA, on the following question: “is the contingent valuation method capable of providing estimates of lost nonuse or existence values that are reliable enough to be used in the natural resource damage assessments?” The final advice of the NOAA panel may be summarised by the following sentence: "... the Panel concludes that well conducted CVM studies can produce estimates reliable enough to be the starting point of a judicial process of damage assessment, including lost passive values." (NOAA, Federal Register, Vol. 58, No. 10, page 4610) This conclusion cheered all researchers who wish to use the contingent valuation. However, the Panel was rather prudent with its conclusion and qualified such a statement by establishing a set of guidelines, recommended to all future CVM applications, concerning the design and execution of the survey instrument. The six most important guidelines, also well known as the six pillars of the NOAA, are summarised as follows: 1. CVM should rely on face-to-face interviews rather than telephone interviews, and whenever this is not possible (specially because of the high costs associated with the personal interviews) telephone interviews are preferable to mail surveys; 2. CVM should elicit the respondent’s WTP to prevent a future incident rather than WTA for an incident already occurred; 3. CVM should use a dichotomous choice referendum elicitation format, i.e., the respondents should be asked how they would vote (favour or against) upon a described environmental quality change. The main reason for the dichotomous choice is that such a take-it-or-leave-it survey valuation question is more likely to reflect real daily world market decisions which individuals are confronted with. Moreover, the dichotomous choice referendum reveals itself to be less vulnerable to strategic bidding behavior than, for example, the open ended elicitation format; 4. CVM should contain an accurate and understandable description of the program or policy under consideration and the associated environmental benefits in each of the two scenarios, i.e., with and without the policy. Interdisciplinary work with other research areas, namely the biological sciences, is here recommended; 5. CVM should include reminders of the substitutes for the commodity in question as well as its budget. In a context where the respondents are being asked how they would vote on a financial contribution to protect a natural area, the respondents should be reminded of the existence of the other areas that exist. Moreover the respondent should be reminded that such contribution would reduce the amount of money that he or she has available to spend on other things. The major idea here is to make such a (hypothetical) valuation exercise resemble as closely as possible an actual market transaction; 6. CVM experiments should include a follow-up section at the end of the questionnaire to be sure if the respondents understood (or not) the choice that they were asked to make.

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Contingent Valuation Method

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A brief history of contingent valuation

The NOAA Panel

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