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Non-Market Valuation: Contingent Valuation

Non-Market Valuation: Contingent Valuation. REM-621 Environmental and Ecological Economics Guest Lecturer: Jonn Axsen Fall 2011. Why we value the environment. Cost benefit analysis Projects New regulations / policies Assessment of environmental damage (compensation / liability)

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Non-Market Valuation: Contingent Valuation

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  1. Non-Market Valuation:Contingent Valuation REM-621Environmental and Ecological Economics Guest Lecturer: Jonn Axsen Fall 2011

  2. Why we value the environment • Cost benefit analysis • Projects • New regulations / policies • Assessment of environmental damage (compensation / liability) • Green accounting (green GDP)

  3. Framework for valuation • Values include: • direct use values • Recreation, harvesting • indirect use values • Ecosystem services like soil retention, climate stabilization, water management, life support • Use (both indirect and direct) values can be for present or future use (option value / bequest value) • non-use values • Existence value • Total economic value = direct use + indirect use + non-use

  4. Techniques for valuation In addition to these methods, benefit transfer is used to apply results of one study – in one region – to another region.

  5. Revealed and Stated Preferences • Revealed: Observed in market (real) • Stated: Elicited from consumer (hypothetical)

  6. Initial thoughts on survey?How did you feel?What was the survey trying to do?

  7. State Preference Approaches • Contingent valuation • Open-ended • Close-ended: iterative bids, dichotomous choice • Choice experiments (bundles of attributes) • Contingent ranking

  8. Contingent Valuation “asks people what they would be willing to pay (or accept in compensation) for changes in quality of an environmental amenity”

  9. Evolution of contingent valuation techniques - example • “What is the most you would be willing to pay to ensure that the old-growth forest in the Stein Valley was preserved in a park?” • “Suppose the only way of preserving the old-growth forest in the Stein Valley is if British Columbia residents agree to pay additional taxes to establish a park in this region. What is the maximum you would be willing to pay, in additional taxes per year, to make sure that this park is created?” • Adds context • “Government is considering establishing a park to protect old-growth forests in British Columbia’s Stein Valley. Creation of the park will increase your taxes by $10/year. Would you be in favour of this measure?” • Dichotomous choice is more natural • Adds realism (respondents are more familiar with taxation than with valuation) • Reduces strategic overstatement

  10. WTP (I would pay…) vs. WTA (I would have to be paid…) • Your Example: Open-ended valuation of Spotted Owls Which is more appropriate: WTP or WTA?

  11. Discrete Choice • Characteristic theory of value: • Value is based on attributes • Choice sets: Compare bundles of attributes • What did we use in Gondola survey? • Respondent chooses preferred bundle • Statistically estimate a flexible model, calculating • Sample utility function, weighting each attribute • MWTP for change in attribute • Value of a combination of attributes • % of sample (or market share) choosing particular bundle • Contingent ranking is similar, but multiple bundles are ranked

  12. Discrete Choice • Your Example: Choices between SFU Gondola and Bus Same as34% GHG Reduction

  13. Simulating Policy Effects • Status quo: same price, trip time, owls, GHGs • Gondola = 67% • Alternative Gondola Policies: • Disturb one pair of owls • Gondola = 37% • Cut GHGs by 50% • Gondola = 93% • Disturb two pairs of owls, cut GHGs by 50% • Gondola = 51% • Disturb one pairs of owls, cut trip time by 10 min. • Gondola = 57% • Disturb one pair of owls, cut price by $7 • Gondola = 49%

  14. SP Limitations: Bias • Hypothetical bias • Difficult to envision? • Budget constraint? • WTP estimates are too large • Social desirability bias: appear “good” • Interviewer bias: influence from interviewer • Anchoring: influenced by starting point • Framing bias: influenced by context

  15. Other SP Limitations • WTA vs. WTP • Appropriate measure depends on situation • In practice, WTP is usually used • Strategic response • Respondents may try to influence public decisions • Over-value if they won’t have to actually pay • Under-value if they might have to actually pay • What about “protest” responses? • Lack of knowledge • Do people understand value provided by that service • Uncertainty, instability in preferences?

  16. Getting the most out of SP Methods • Sampling technique • Choose appropriate population • Select representative sample (or weight correctly) • Maximize response rate (or minimize non-response bias) • Survey mode • Face-to-face interviews are ideal • Carefully choose among phone, mail or internet • Conservative survey design • Use WTP rather than WTAP (NOAA cuts WTP by 50%...) • Remind respondents of substitute resources • Referendum/choice rather than open-ended • Incorporate/measure respondent uncertainty?

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