Valuation methods and policy making in environmental economics


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What is even more interesting in this study is that the researchers experimented with altering the conditions under which respondents were to make decisions about their WTP figures. Specifically, a subset of the respondents were given time to think about their WTP before they had to declare WTP to the enumerators.

In contrast to an earlier study by Whittington et al. The only instance in which some effect was noted was when analysing WTP for sewer connections by households with WCs. In this case, as expected on t e grounds of the results of the previous Whittington et al. The researchers also checked whether the presence of other household members altered people's WTP, but found no evidence bias induced by the presence of other people present at the interview.

220 – Valuing environmental intangibles, part 3: The cons

When estimating the health benefits of a proposed policy reducing pollution or imposing workplace environmental regulation, it can be shown that a person's willingness to pay to pass the policy is comprised of four distinct components, capturing the changes in i medical expenditure, ii work income lost to illness; iii expenditures incurred by the individual to reduce pollution exposures; and iv the value of the discomfort associated with illness. To illustrate, assume that an individual's well-being increases with aggregate consumption X and leisure L , but is negatively affected by sick days, D:.

The individual chooses the levels of L, X, and A to maximize utility, subject to the budget constraint:. Equation 10 assumes that the individual must allocate his time between work and leisure, and spend income on aggregate consumption and medical care, M, which in turn depends on the number of sick days, and on the averting activity. The prices of M and of A are equal to and , respectively, whereas the price of a unit of the aggregate consumption good is normalized to one.

Sick time enters in the budget constraint because it reduces work time available to the individual. Willingness to pay for environmental quality. An individual's willingness to pay WTP for a reduction in pollution is the amount that must be taken away from the individual's income while keeping his or her utility unchanged:. Following Harrington and Portney , it can be shown that WTP for a small change in pollution can be decomposed into:.

Equation 12 states that marginal willingness to pay is comprised of marginal lost earnings and medical expenditures, and of the marginal cost of the averting activity. In addition, willingness to pay includes the disutility discomfort of illness, converted into dollars through dividing by the marginal utility of income. This has two important implications for valuation work: First, following equation 13 , WTP for a reduction in pollution could be computed by asking individuals to report their WTP to avoid illness per se without implicating pollution , and then blending such WTP figures with epidemiological evidence, summarized into.

Alternatively, one may turn to the components of WTP in the right-hand side of equation In practice, however, researchers following this second approach have focused on estimating only some of these components of WTP using revealed preference data, due to the obvious difficulty of measuring the value of the disutility of illness. In recent years, local and country governments in developing countries have increasingly needed information about the costs and benefits associated with reduced levels of pollution to assist them in setting or revising standards and imposing pollution control measures.

To determine the value of the damages to health both morbidity and mortality due to air pollution, analysts have traditionally relied on concentration-response functions linking pollution levels to health effects in the population as in equation 9 , and estimates of willingness to pay to avoid such effects.

For lack of original studies in the countries where the benefits are to be estimated, analysts have sometimes resorted to extrapolating concentration-response functions estimated in the United States to the levels of pollution in the target country Ostro, This approach has been criticized as potentially invalid on the grounds of the different cultural, behavioural and institutional circumstances, and of the difficulty of finding places with matching environmental conditions from which predictions can be made for the target country.

Similar techniques have been applied to produce WTP figures, after adjusting for the income differential between the two countries Krupnick et al. Two recent studies, however, have questioned whether this approach is satisfactory, showing that willingness to pay to avoid illness can be higher in Taiwan and Thailand than one would expect from extrapolations from United States studies Alberini et al. Respondents were also asked about the severity of these symptoms, and about activities undertaken to alleviate symptoms such as seeing a doctor and the related expenditure.

The diaries' data were matched with pollution and meteorological readings taken at a monitor located within meters from the respondent's residence for a total of 5 monitors , and with information about the respondent's socio-demographics and chronic health conditions if any , resulting in a panel dataset containing observations respondents times 92 days. Participants were selected by random sampling after stratification by age, with the sample including both children and adults.

The levels of particulate matter of diameter less than 10 microns PM10 measured at the five monitors varied widely from one to the next and across sites. Ozone, sulphur dioxide and nitrogen dioxide readings were very low and well below both Taiwan and comparable United States ambient standards. Perhaps the most surprising finding from the health diaries was that illness rates were extremely low.

Almost one-half of the Taiwanese made it through the study period without experiencing any of the symptoms under investigation. On the average day, only 4. The most commonly reported symptoms were cold and flu, followed by cough with phlegm, runny nose, sore throat, dry cough, and headache. Wheezing, allergy and asthma attacks were rare.

Doctor visits, use of medication, and work days lost to illness were rather infrequent: on any day of the study, 1. Despite such low illness rate, Alberini and Krupnick find a positive and significant relationship between PM10 and respiratory symptom-days. The probability of beginning a new episode of illness is related to PM10 levels, even after one controls for temperature, relative humidity and other factors potentially influencing illness.

The effect of PM10 is significant for both non-infectious symptoms and infectious i. The effect of PM10 varies dramatically across groups of subjects, with non-smokers, males, plus-year-olds and persons not subject to occupational exposures to fumes and dust the most sensitive.

Among persons that do not suffer from a chronic respiratory illness, the expected incidence rate is 1. These figures are much lower than the predictions obtained from a similar model, fitted to daily data from a study conducted in Los Angeles area in see Alberini and Krupnick, Specifically, the predicted rates for Taiwan from the Los Angeles concentration-response function are 4.

Finally, while PM10 levels influence the onset of illness, they do not affect the duration of the episodes of illness, once they start. The Taiwan Contingent Valuation Survey. About nine months after the completion of the diaries study, respondents were recontacted and asked to participate in a contingent valuation survey about their most recent episode of acute respiratory illness.

The questionnaire was administered to the respondent in face-to-face interviews conducted by professional enumerators. Respondents were first to describe their most recent episode of illness by i checking which of the symptoms listed on a card they had experienced; ii reporting the duration in days of each symptom on a time line; iii answering questions to further identify the nature of the illness and its seriousness for instance, was the illness a cold, or the flu?

Pollution was never mentioned to the respondents in this portion of the study. Finally, respondents were asked to imagine that they were about to experience, in a few days, a similar illness. How much - the questionnaire asked them - would they be willing to pay to completely avoid a recurrence of such an episode of illness? To facilitate their answers, the question was re-phrased using the dichotomous-choice format.

To refine information about WTP, two follow-up questions followed their "yes" or "no" answers to the initial payment question. This approach to eliciting WTP to avoid illness is different from that used in previous studies in the United States Loehman et al. This has both advantages and disadvantages. An advantage is that the respondent is familiar with the illness, and that reported willingness to pay reflects mitigating behaviours. Although the survey instrument places a relatively heavy burden on the respondent, focus groups conducted at various stages of the development of the survey instrument suggested that focus group participants generally accepted the questions and were relatively comfortable with the hypothetical nature of the payment question.

The income elasticity of WTP is approximately 0. The estimated coefficients of the WTP equation remain stable when estimation is restricted to the responses to the initial payment question, or to these plus the responses to the first round of follow-ups. Median WTP to avoid an average illness one that lasts 5. There is a considerable degree of variation in WTP, depending on the length and seriousness of the episode one considers. To assess the appropriateness of benefit transfer procedures, Alberini et al.

They use two alternative formulae:. Formula 14 thus presumes that the income elasticity of WTP is 1. If the illness day here considered causes restrictions in daily activities, the dollar figures from the original United States studies and for Taiwan can be summarized as shown in Table 1.

Table 1. Benefit transfer comparisons for WTP for one-day head cold. All figures are expressed in US dollars. Based on these comparisons, one can neither confirm nor rule out the appropriateness of benefit transfers. For benefit transfers from the Los Angeles study, the Los Angeles concentration-response function tends to overpredict illness rates for Taiwan, while United States WTP figures tend to either overpredict the Tolley et al.

The net effect of extrapolating the morbidity benefits of a reduction in air pollution from Los Angeles to Taiwan is that the latter tend to be overstated. Comparison between WTP and the cost-of-illness approach. The Taiwan study also allows one to compare WTP to avoid illness with the cost of illness the sum of medical expenditures plus work income lost to illness.

This comparison is useful for three reasons: First, it acts as a validity check for the WTP figures reported by the respondents in the contingent valuation survey. As seen earlier, economic theory posits that WTP to avoid illness should be greater than cost-of-illness measures, which represent a lower bound for WTP. Assuming that the CV study has been correctly designed and implemented, one would then expect estimated WTP to be greater than cost-of-illness figures.

Second, since cost-of-illness figures may in some instances be obtained from official statistics, and may be easier and less expensive to obtain than survey-based WTP data, if one knew - at least approximately - what fraction such costs represent of total WTP, one would be able to obtain a rough estimate of the health damages of air pollution by multiplying the cost of illness by the inverse of that fraction.

Third, given the differences in cost and availability of medical care, sick leave systems and perception of illness between western countries and developing countries, it is of independent interest to see if WTP to avoid illness is, in Taiwan, as large a fraction of the total damages as it is in the United States. It is widely recognized that the cost of illness provides only a lower bound for the correct measure of willingness to pay Harrington and Portney, The few empirical studies that have directly queried individuals about their willingness to pay to avoid illness, and have compared WTP with cost-of-illness figures incurred by the same subjects for comparable illnesses, have found that WTP is 1.

The ratio increases with particulate matter levels, because as pollution worsens people experience more symptoms, but their doctor visits, prescription medication expenses and lost earnings do not increase proportionally. These numbers are consistent with economic theory, which predicts that WTP to avoid the health effects of pollution is greater than the cost-of-illness measure.

The Bangkok Study. Another study eliciting TP to respiratory symptoms of varying severity was conducted by Chestnut et al. The sample who was given a contingent valuation survey questionnaire had previously participated in a prospective cohort study from December to April , and had recorded the presence or absence of respiratory symptoms on a daily basis.

Subjects were recruited among adult resident of the Odean Circle area and nurses working at a local hospital who lived in nurse dormitories near the hospital. Children were also followed as part of the epidemiological study, but were excluded from the CV survey. All subjects were selected among the residents of area near air quality monitors, and the sample cannot be assumed to be representative of the pop lation of Bangkok.

Chestnut et al. Indeed, Chestnut et al. Since household and per capita income in Bangkok are approximately one-quarter to one-third of their United States counterparts, these findings suggest that Bangkok residents place relatively high value of avoiding respiratory symptoms. The figures obtained in the study also compare well to those obtained by Alberini et al. In the Chestnut et al. This is the only application of this elicitation approach that we are aware of in a developing country.

Chestnut et al report that a number of people reported WTP equal to zero. Many of these respondents, however, are argued to truly place a value on avoiding illness, but to "protest" or simply fail to understand the trade-off between income and health implied in the contingent valuation exercise. Chestnut et al were unable to check for the relationship between income and WTP, because the income variable was affected by too many missing values, but found that nurses had lower WTP values for avoiding the mentioned health endpoints.

In , Whittington et al. While one independent subsample of respondents was given the questionnaire following the usual protocol, the other was asked to go home, discuss matters with family members and neighbours and answer the payment question overnight. The respondents in the former group were also re-interviewed at a later time to determine the likelihood of WTP revisions, as well as the magnitudes of those revisions.

The results were astounding: For both commodities, those persons who had had time to think about the commodity reported systematically lower WTP amounts. The researchers ruled out strategic considerations as the reason for these findings, and concluded that giving respondents time to think resulted in WTP bids of superior quality. The expectation that time to think would lower WTP is refuted in another study led by Whittington Whittington et al.

In Whittington et al. To answer this question, a split experimental design was developed that involves three plans of increasing scale a sewer system only; b sewer system plus wastewater treatment plant; and c sewer system, wastewater treatment plant, plus regional plan to preserve surface water quality , and two time-to-think treatment a standard questionnaire, plus one allowing two or three days to complete the interview , for a total of six combinations.

The researchers found that people were able to appreciate the difference in size between programmes a and b , whether or not they had been given time to think. Respondents who had been given time to think liked plan c less than plan b , perhaps because reflecting upon the matter had made them realize and reject the role of the government in the provision of programme c , or because they had a better chance to identify the op ortunity for free riding behaviours. The time-to-think protocol was also adopted by Swallow and Woudyalew in their tsetse fly control study. A somewhat different approach to valuing a safe drinking water is presented in Rosado Rather than querying respondents about their willingness to pay for safer water, this paper uses information about their actual behaviour to avoid drinking unsafe water in an urban agglomeration in the state of Espirito Santo, Brazil.

Specifically, a number of options are identified, such as filtering the water or boiling it, each of which implies a certain cost and time requirement. A nested logit model is then fit to predict the option selected by the respondent as a function of the cost and time requirement for each alternative, interacted with respondent socio-demographic characteristics. The value of safer drinking water is then computed as the compensating variation of eliminating one of the possible water disinfection options see Freeman, , for the relevant formulae. Since this study focuses on individual defensive behaviour, it should provide a lower bound for WTP for safer water, which could be co pared with WTP elicited from a contingent valuation study.

This approach has the advantages of being based on actual behaviour, and of getting around the complex issue of having to query respondents about reductions in the probability of exposure to contaminated water, and in the probability of becoming ill, having ingested contaminated water. One of the most recent developments in valuation work based on stated preferences is the use of so-called "choice experiments. It can be shown Louviere, that WTP can be identified as long as in addition to A and B the respondent is offered the option to "do nothing" an option that involves not changing the status quo, and not paying anything at all.

In general, respondents participating in a "choice experiment" study are offered several pairs containing various combinations of policy or good attributes and costs plus the "do nothing" option , so that one can obtain more information from any given respondent abo t the marginal valuation of each attribute.

Proponents of the "choice experiments" method believe that it has several advantages: Presumably, it encourages respondents to concentrate on the trade-offs between characteristics of the good or public programme, as opposed to taking a position for or against a policy. Adamowicz et al argue that the repeated nature of the choice task makes it difficult to behave strategically. Much like contingent valuation, choice experiments allow valuation of a good at conditions that do not currently exist. For instance, it would not be possible to use observed behaviours to place a value on cleaning up a lake if the lake has always been polluted.

Possible difficulties associated with choice experiments include respondent fatigue, frustration if the respondent dislikes all of the possible alternatives , and the decision to ignore one of the attributes if its level lacks credibility. Although choice experiments have been used extensively in the United States and Canada in transportation studies especially to explain mode choice as a function of its attributes , marketing studies, and natural resource damages assessment work, we are not aware of any applications in developing countries.

Jayne et al. Contingent behaviour questions typically ask respondents what they would do under specified hypothetical circumstances. If the price per trip to destination X would rise to Y, would the respondent stop taking trips to X altogether? If the price of a commodity would rise or drop to X, how much of that commodity would the respondent purchase? Jayne et al ask respondents in Kenya, Zimbabwe and Mozambique what their expected purchases of refined cornmeal, coarse cornmeal and other substitutes would be under a variety of price and deregulation scenarios.

The stated preference data collected in this fashion was combined with revealed preference data the respondents' actual purchases of these commodities to estimate demand functions that predicted well the actual purchases after price controls were lifted and other reforms were enacted.

In sum, we believe the applications of the method of contingent valuation in developing countries have generally followed high standards, and have produced useful results. They have also uncovered a number of difficulties associated with the description of the commodity, the role of the government in providing public programmes, and the presentation of the cost information to the respondent.

We hope that this report will prove useful to those who wish to design and conduct new contingent contingent valuation surveys in developing countries, and will offer guidance on how to interpret the results and findings from existing contingent valuation studies. We also hope that this report will offer ideas on alternative stated preference approaches. Adamowicz, W. Boxall, M. Williams and J. Stated preference approaches for measuring passive use values: choice experiments versus contingent valuation. Working Paper. Alberini, A. Optimal designs for discrete choice contingent valuation surveys: single-bound, double-bound and bivariate models.

Journal of Environmental Economics and Management, Testing willingness-to-pay models of discrete choice contingent valuation data. Land Economics, Boyle and M.

Analysis of contingent valuation data with multiple bids and response options allowing respondents to express uncertainty. Cropper, T. Fu, A. Krupnick, J. Liu, D. Shaw, and W. Valuing health effects of air pollution in developing countries: the case of Taiwan," Journal of Environmental Economics and Management, Kanninen and R. Modeling response incentive effects in dichotomous choice contingent valuation data. Land Economics, 73 3 : Air pollution and acute respiratory illness: evidence from Taiwan and Los Angeles.

American Journal of Agricultural Economics, Air quality and episodes of acute respiratory illness in Taiwan cities: evidence from survey data. Journal of Urban Economics, Cost-of-illness and WTP estimates of the benefits of improved air quality: evidence from Taiwan. Land Economics, forthcoming. Altaf, M. Measuring the demand for improved urban sanitation services: results of a contingent valuation study in Ouagadougou, Burkina Faso.

Urban Studies, 31 4 : Whittington, H. Jamal, and V. Rethinking rural water supply policy in the Punjab, Pakistan. Water Resources Research, 29 7 : Arrow, K. Solow, P. Portney, E. Radner, and H. Federal Register, Boyle, K. Welsh, and R. Validation of empirical measures of welfare change: comments and extension.

Cameron, T. Interval estimates of non-market resource values from referendum contingent valuation surveys. Land Economics 67 4 : OLS versus ML estimation of non-market resource values with payment card interval data. Shaw, and S. Nonresponse bias in mail survey data: salience v. Herriges and C. Kling eds. Carson, R. Constructed markets. Braden and C. Kolstad eds. Flores, K. Martin, and J. Contingent valuation and revealed preference methodologies: comparing the estimates for quasi-public goods.

Hanemann, R. Kopp, J. Krosnick, R. Mitchell, S. Presser, P. Ruud and V. Kerry Smith. Review of Economics and Statistics, 80 3 : Mitchell, M. Kopp, S. Presser and P. Contingent valuation and lost passive use: damages from the Exxon Valdez. Chestnut, L. Ostro, N. Vichit-Vadakan, K. Smith and Feng C. Final Report. Health effects of particulate matter air pollution in Bangkok. Choe, K. Whittington and D.

The economic benefits of surface water quality improvements in developing countries: A case study of Davao, Philippines. Land Economics, 72 4 : Cooper, J. Optimal bid selection for dichotomous choice contingent valuation surveys. A comparison of approaches to calculating confidence intervals for benefit measures from dichotomous choice contingent valuation surveys. Land Economics, 70 1 Referendum contingent valuation: how many bounds are enough?

Paper presented at Amer. Washington, D. The effect of rental rates on the extension of conservation reserve program contracts. American Journal of Agricultural Economics, Vol. Hanemann and G. One and one-half bound dichotomous choice contingent valuation. Creel, M. Semi-nonparametric distribution-free dichotomous choice contingent valuation.

Journal of Environmental Economics and Management 32 March : Cropper, M. Contingent valuation. Newman ed. Dickie, M. Willingness to pay for ozone control: inferences from the demand for medical care. Ekstrand, E. Incorporating respondent uncertainty when estimating willingness to pay for protecting critical habitat for threatened and endangered fish. Water Resources Research, 34 11 : Freeman, A. Myrick III. The measurement of environmental and resource values: theory and methods, Washington, D.

Hadker, N. Sharma, A. David and T. Murateed Haran. Willingness to pay for Borivli National Park: evidence from a contingent valuation. Ecological Economics, Hammitt, J. Evaluating the effect of visual aids on willingness to pay for a reduction in mortality risk. Hanemann, W. Willingness to pay and willingness to accept: how much can they differ? American Economic Review, 81 3 : Loomis and B. Statistical efficiency of double-bounded dichotomous choice contingent valuation. American Journal of Agricultural Economics 73 4 : Harrington, W. Valuing the benefits of health and safety regulation.

Hoehn, J. A satisfactory benefit cost indicator from contingent valuation. Jayne, T.

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Rubey, F. Lupi, D. Tschirley, and M. Estimating consumer response to food market reform using stated preference data: evidence from Eastern and Southern Africa. Kanninen, B. Optimal experimental design for contingent valuation surveys. Bias in discrete response contingent valuation.

Decision-making and Valuation for Environmental Policy

Journal of Environmental Economics and Management, 28 1 : Krupnick, A. The value of the health benefits from ambient air quality improvements in Central and Eastern Europe: an exercise in benefit transfer. Environmental and Resource Economics, 7 4 : Loehman, E. Berg, A. Arroyo, R. Hedinger, J. Schwartz, M. Shaw, W. Fahien, V. De, R. Fishe, D. Rio, W. Rossley and A. Distributional analysis of regional benefits and costs of air quality control.

Journal of Environmental Economics and Management, 6: Application of stochastic choice modeling to policy analysis of public goods: a case study of air quality improvements. Review of Economic and Statistics, Louviere, J. Combining revealed and stated preference data: the rescaling revolution. McPhail, A. Why don't households connect to the piped water system?

Observations from Tunis, Tunisia. Land Economics, 70 2 : Mitchell, R. Using surveys to value public goods: the contingent valuation method. Navrud, S. Environmental valuation in developing countries: the recreational value of wildlife viewing. Ostro, B. Estimating the health effects of air pollutants: a method with an application to Jakarta. Randall, A. Ives and C. Bidding games for valuation of aesthetic and environmental improvements.

In This Article

Journal of Environmental Economics and Management, 1: Ready, R. Whitehead and G. Contingent valuation when respondents are ambivalent. Rosado, M. Willingness to pay for drinking water in urban areas of developing countries. Rowe, R. Energy and Resource Consultants, Inc. Schultze and W. A test for payment card aiases," Journal of Environmental Economics and Management, 31 2 : Shultz, S. Pinazzo, and M.

Opportunities and limitations of contingent valuation surveys to determine national park entrance fees: evidence from Costa Rica. Environment and Development Economics, 3: Shyamsundar, P. Tropical forest protection: an empirical analysis of the costs borne by local people. Singh, B.


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Ramasubban, R. Bhatia, J. Briscoe, C. Griffin, and C. Rural water supply in Kerala, India: how to emerge from a low-level equilibrium trap. Swallow, B. Evaluating willingness to contribute to a local public good: application of contingent valuation to tsetse control in Ethiopia. The demand for water in rural areas: determinants and policy implications. The World Bank Research Observer, 8 1 : Tolley, G. Babcock, M. Berger, A. Bilotti, G. Blomquist, M. Brien, R. Fabian, G. Fishelson, C. Kahn, A. Kelly, D. Kenkel, R. Krumm, T. Miller, R. Oshfeldt, S. Rosen, W. Webb, W. Wilson and M.

Valuation of reductions in human health symptoms and risks. Wang, Hua. Welsh, M. Elicitation effects in contingent valuation: comparisons to a multiple bounded discrete choice approach. Whittington, D. Administering contingent valuation surveys in developing countries. World Development, 26 1 : Lauria, and X.

A study of water vending and willingness to pay for water in Onitsha, Nigeria. Kopp, W. Pommerehne and N. Schwartz eds. Briscoe, X. Mu and W. Estimating the willingness to pay for water services in developing countries: a case study of the use of contingent valuation surveys in Southern Haiti. Economic Development and Cultural Change, Okarafor, A.

Okore, and A. Strategy for cost recovery in the rural district sector: a case study of Nsukka District, Anambra State, Nigeria. Water Resources Research, 26 9 : Smith, A. Okorafor, A. Okore, L. Lium and A. Giving respondents time to think in contingent valuation studies: a developing country application. Journal of Environmental Economics and Management, 22 3 : Lauria, K. Choe, J. Hughes and V. Household sanitation in Kumasi, Ghana: a description of current practices, attitudes, and perceptions.

World Development, 21 5 : Lauria, A. Wright, L. Household demand for improved sanitation services in Kumasi, Ghana: a contingent valuation study. Water Resources Research, 29 6 : Davis, H. Miarsono, and R. Respondents who answered "no" to the initial payment question might think that the program provided to them at the lower cost stated in the follow-up question is a scaled-down, lower-quality variant of the government program.

To the extent that this is true, respondents would tend to answer "no" to the follow-up question, thus lowering the final WTP estimate. They contrast such reactions with those of foreign visitors to the two national parks examined in their study, who were very comfortable about participating in the survey. It is possible that for cultural reasons the women interviewed did not feel free to report their own preferences. I, benefit transfers may be feasible when the commodity to be valued is a private good, such as a health endpoint. In short, this method assumes that each trip to the destination of interest costs money to the person undertaking the trip, the price of a trip being comprised of transportation costs e.

For a given site, the price of a trip varies across visitors, because of their different incomes and the different distances from the site. It is assumed that trips and quality of the site are weak complements, the former being an increasing function of the latter. A single-site study thus fits the following econometric equation: , where r is the number of trips undertaken by the respondent in a specified time frame a year, or a fishing season , is the price of a trip, Q is site quality, and X is a set of respondent characteristics e.

Possibly, costs are the lowest limit to the benefits when purely economic considerations are made. Sometimes non-economic considerations dominate the economic ones and in those cases, costs may be overwhelmingly higher than the economic benefits. It is assumed that man is rational in economic sense of rationality. But in fact, man is so much guided by emotions, feelings, etc. On these considerations, damage avoidance or replacement methods of valuation are best suited only to cases where damage avoidance or replacement expenditures have actually been, or will actually be, made.

These are risky and inaccurate methods to use. Valuation on the Expressed Willingness to Pay : As it has been mentioned earlier, many environmental goods and services are not traded in markets, nor are they closely related to or tied with any marketed goods. In such situations, therefore, a survey designed to make the people face an artificial scenario may be carried out.

They may directly be asked as to what they would be willing to pay, if that is the hypothetical scenario. In a simulated condition, people can be asked to make tradeoffs among different alternatives. Based on this scheme, two methods have been suggested. It is based on an assumption that people would do what they say. Indeed this assumption makes the foundation of this method rather shaky because the congruence in thinking, saying and doing is not necessary.

It is easy said than done, goes the proverb. However, if there is some significant association between saying and doing, this method may be very successful in eliciting the willingness of the people to pay for the environmental goods and services and thus, their value. Therefore, granted that its assumption is correct, the contingent valuation method is a very versatile method which can be applied to valuation of almost any kind of environmental goods and services irrespective of their being marketed or not marketed.

On the other hand, it is also the most controversial among the non-market valuation methods, mainly on account of its shaky assumption. It would be worthwhile to describe the steps to be followed in the application of this method to valuation of environmental goods and services. To begin, the evaluator has to define the valuation problem, describing its nature, relevance, implications, etc. In the second step, the nature and procedure of survey are decided.

Which questions are to be asked? What would be the sample size? And such details about the instrument, respondent and procedure of the survey must be carefully determined. These surveys may be quite expensive if the respondents are to be met in person. In such cases, the cost constraints on survey are to be looked into. The instruments and the procedure of survey are to be tested and perfected before they are finally executed. In the next step the actual survey is implemented on the sample respondents chosen by a well-designed sampling method.

Finally, the data obtained through the surveys are analyzed to estimate the expressed willingness to pay. In the analysis one may deal with the non-responses suitably. In the application of contingent valuation method, many respondents may not be able to appreciate the problem and their expressed willingness to pay may incorporate this kind of bias.

The success of this method lies in drawing conclusions net of these biases. This is a stupendous task. Although it is claimed that this method is equally effective in obtaining various types of values — use value, non-use value, optional value and bequest value — one must look into the biases that people exhibit between choice of the present over the future and the choice of themselves over the others their children. The future is uncertain. People experience a sea change in things only in the part of their life time. Uncertainty always costs and this cost is very likely to be incorporated in the values that the respondents express.

In using the contingent valuation method, this fact should not be lost sight of. The Contingent Choice Method: Much like the contingent valuation method, the contingent choice method is a very versatile method, which can be applied to valuation of almost any kind of environmental goods and services irrespective of their being marketed or not marketed. Contingent choice method is also referred to as the conjoint analysis. This method is similar to the contingent valuation. Like the contingent valuation method, it is based on asking people to state their willingness to pay, contingent on a specific hypothetical scenario and description of various environmental goods and serviced of which they have to make a choice.

The method elicits information from the respondent on preference between various alternatives of environmental goods and services, at different price or cost to the individual. The prices may be single or multiple valued. The full details on these baskets or combinations are given to the respondents. The respondent is made to choose A, B, etc.

This exercise provides the preference structure of the respondents and associates that structure with the prices. There are several alternative formats to carry out the contingent choice analysis. Some of them are: a Contingent Ranking — in the surveys individuals are asked to compare and rank alternative action outcomes with various characteristics, including costs, b Discrete Choice - respondents are simultaneously shown various alternatives and their characteristics, and asked to identify the most preferred alternative in the choice, c Paired Rating - - respondents are asked to compare two alternate situations and are asked to rate them in terms of strength of preference.

The choices bade by the respondents are statistically analyzed using discrete choice statistical techniques, to determine the relative values for the different characteristics or attributes. Since price is one of the characteristics of the alternatives, the choice is tagged with the pecuniary measure. It may be noted that derivation of values from the data on contingent choices is more difficult and demanding than that from the data on contingent valuation.

Various methods have been developed for this purpose. Discrete choice analysis encompasses a variety of experimental design techniques, data collection procedures, and statistical procedures which can be used to predict the choices that consumers will make between alternatives.

These techniques apply when consumers have the ability to choose between distinct "discrete" courses of action. The contingent choice method is perhaps the most effective method to elicit the expressed willingness to pay for environmental goods and services that may or may not be traded in the market.

However, it has several limitations due mainly to the methodology it adopts. First, r espondents may find some tradeoffs difficult to evaluate, because they are unfamiliar with them — which may introduce information bias into their choices. Secondly, the respondents may apply very simplified and routine decision rules if the choices are complicated. Thirdly, the complexity of survey, response and analysis grows at least at a quadratic rate with the number of alternatives included in the scenarios.

When presented with a large number of tradeoff questions, respondents may lose interest or become frustrated and psychologically inconsistent. On the other hand, by only providing a limited number of options, the survey may force respondents to make choices that they were not to make otherwise. Valuation by using Similar but Extraneous Information: Sometimes it is possible to obtain information on the valuation of environmental goods and services done elsewhere, in similar or somewhat different context. It is possible to use that information to valuation at hand.

The method that does this is called the Benefit Transfer Method. It is important to note that benefit transfers can only be as accurate as the initial study. Moreover, since the context or locational attributes of the initial study do not fully match with the exercise at hand, this method is prone to several limitations. Nevertheless, it may provide some measure to the importance and benefits of environmental goods and services.

It may be possible to reinforce or modify the benefit transfer exercise on evaluation by some limited study in the field under consideration. A suitable study that would not require much time and resources may be carried out to obtain some information regarding the valuation problem at hand and in the light of this information, the initial values may be modified. However, the enterprise of measuring the benefits of such goods and services in money terms has a cultural bias often unnoticed or ignored.

Long back, Thorstein Veblen a , pointed out that prevalence of pecuniary measures in all walks of life is a sine qua non and the characteristic feature of the Leisure class culture. Measurement of everything in monetary terms becomes the habit of mind since people cannot understand anything that does not refer to money. This habit enters into the collective unconscious. Valuation of environmental goods and services in pecuniary measures is only an expression of this habit of thought.

This is a particular type of habit of thought, inculcated by the neo-classical economists, with which we think. This leads to deification of money. Assigning immutability to value of money introduces a serious bias in valuation, especially when the experience suggests that value of money varies over time, among income groups, etc. We have pointed out the weaknesses of every method described above, irrespective of the fact whether a particular one is based on the revealed, imputed or expressed willingness to pay.

Each one is prone to give valuation that may not be sensitive enough to discriminate the less beneficial from the more beneficial. Their standard errors of estimate interpreted slightly liberally are so large as to make them insensitive measures of differential values. In the travel cost method, the travel cost of visit is the proxy variable.

Similarly, in imputed and expressed valuation methods also, valuation of proxy variable is carried out. This is a difficult question to answer. Earlier, we have tentatively hinted at other assumptions that are made to make these methods rest on. There could be a serious and wide hiatus between the status of being desired and that of being desirable. Desires spring from instincts, emotions and habits. Most of the desires are rooted in the culture in which one lives and is brought up.

With the economic progress, larger and larger part of desires become culture bound. A leisure class culture characterizes high valuation of conspicuous consumption and conspicuous leisure. Wastage is culturally supported. In this milieu, the desires of the people may suggest the value system that is characteristically wasteful and detrimental to the prudent allocation and use of scarce economic and environmental resources.

We have also seen that the valuation methods based on measurement of expressed willingness to pay assume that what people say they would also do. This assumption is far from being realistic. The divergence between saying and doing may cripple the contingent valuation method. Investigations have shown a considerable inconsistency in pair-wise comparisons of alternatives. Inconsistencies creep in even when the people making choices are dealing with the real world situation.

When they are dealing with the artificial choice situation, inconsistencies may be much more alarming. Although it has been attempted to derive consistent and transitive preference pattern from the inconsistent choice data, the results are, in general, far from being satisfactory.

Otherwise also, the contingent choice method of valuation has not been put to empirical tests of validity. In this situation, one has to accept the validity of these methods only with a caution. The idea that the consumer assigns meaning to environment and the nature, places man in general and the consumer, his purchasing power and his willingness to spend in particular, in the center. This reflects the attitude of man towards the non-human environment - his sense of the collective power of human communities over the nature.

This sense of power, especially underneath the contingent valuation and contingent choice methods, is not very eco-friendly in its nature and impact on human decisions regarding the environment. In this sense, pecuniary valuation of environmental goods and services is ill conceived.

It is based on the mechanistic conception of the economy as well as the ecology that houses the economy. Looking at the problem in this manner suggests us to evolve non-pecuniary methods of valuation of environmental goods and services. One may look into the possibilities of non-pecuniary valuation in economic models such as von Neumann balanced growth model and others developed along that line. The original von Neumann model of an expanding economy does not include consumption and makes several unrealistic assumptions.

Michio Morishima Takayama, pp. The von Neumann-Morishima model of the expanding economy does not include money in it, and therefore, it does not give us prices in pecuniary terms. All the relations in the model are in physical terms. The model gives optimal non-negative outputs and prices.

Operations, expansion and structural changes in an economy and its place in the ecology may be viewed not from the angle of maximization of utility or economic gains, but from the angle of increase in the entropy of the ecological system in which the economy is placed.

Increase in entropy over time is unavoidable, but the rate of its increase can be influenced by a deliberate policy implementation. Slower increase in entropy is environmentally desirable. If we chose to minimize the rate of increase in entropy, we have to choose the decision variables suitably Georgescu-Roegen, This approach also looks at the economy as an evolving organism than a mechanistic system.

Abdalla, C. Adamowicz, W. Babb, E. Beattie, J. Berger, M. Tolley, D. Fabian Eds. Bjornstad, D. Boyle, K. Preliminary implications for a meta analysis of contingent-valuation studies. Brajer, V. Appley Ed. Brookshire, David S. Cairns, J. Clarke, Edward H. Cummings, R. Valuing environmental goods: A state of the art assessment of the contingent valuation method. Cummings, Ronald G. Darling, Arthur H. Davis, Robert K.

Desvouges, William H. Diamond, P.

Valuation methods and policy making in environmental economics Valuation methods and policy making in environmental economics
Valuation methods and policy making in environmental economics Valuation methods and policy making in environmental economics
Valuation methods and policy making in environmental economics Valuation methods and policy making in environmental economics
Valuation methods and policy making in environmental economics Valuation methods and policy making in environmental economics
Valuation methods and policy making in environmental economics Valuation methods and policy making in environmental economics

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