environmental economics -contingent_valuation

8/13/2019 Environmental Economics -Contingent_Valuation

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Environmental Economics


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Valuing the Environment

Environmental Valuation

Enable environmental impacts to be

included in Cost-Benefit-Analysis (CBA)

To take account of environmental damage

in measuring economic performance

To take account of environmental benefitsof public programs


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Categories of environmental

benefits

Use Value (UV)

Existence Value (EV)

Option Value (OV)(Option Price = Expected Use

Value + OV. Quasi Option Value (QOV)

Bequest Value (BV)

Total Economic Value (TEV)

TEV = UV+EV+OV+QOV+BV


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Non-market valuation techniques

Stated Preferences

Contingent Valuation

Choice Modelling

Revealed Preferences

Travel Cost Model

Hedonic Pricing


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The Contingent Valuation Method

Stated preference technique

Questionnaire based

Direct method

Valuation of a hypothetical scenario

- It is called contingent valuation because the

valuation is contingent on the hypothetical

scenario put to respondents Non Use Values + Use Values

Willingness To Pay (WTP) question


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Stated Preference Techniques: CVM

An interview is used to create the hypothetical marketwithin these questions are

asked. The hypothetical market comprises two key parts:

a statement of the proposed change; and

an institutional mechanism through which the proposed change is to be

provided/avoided and financed.

The challenge in conducting a CV is to make the market as realisticas possible.

The process of directly questioning a sample group to ascertain their valuation of achange can be divided into six stages. These are (each with a number of steps):

definition of survey objectives;

design of the questionnaire;

surveying the sample population;

creating a database and performing an exploratory data analysis;

estimating WTP values; and

reporting the survey results.


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CVM: Stage 1 - Project Definition - Theoretical Model

CV study should begin with a basic theoretical model: two purposes:

Identifies the information required from questionnaireGenerates predictions allowing results to be checked

Number of sources of information that can be used to construct the

model, including:

predictions of economic theory and existing literature,

discussion/meetings with focus groups/affected parties.

Participants discuss understanding of the context of the good/service in

question, the good/service itself, its value, who should provide it,how it should be paid for, whether they would contribute, etc.

The information from the focus groups is particularly valuable in

designing the CV survey.


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CVM: Stage 2 - Questionnaire Design - Background Questions

General background: Questions on general characteristics of the

respondentsinformation for checking the validity of the valuation

results

Respondents tastes and socio-economic characteristics (is the

sample representative?). Personal details - should , come at the end of

the questionnaire

Respondents knowledge of the commodity in question, e.g.

background questions concerning the respondents visits to a recreation

site should cover such issues as:

attitudes towards environmental issues; proximity of theirhome to the site; frequency of visits; duration of trip;

reason for visit, etc.

These questions should be asked at the beginning of the interview as

they are relatively straightforward to answer, and will help to build-upthe res ondents confidence.


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CVM: Stage 2 - Questionnaire Design - Preparation Questions

To avoid bias, interviewer must make sure the respondent is aware of:

budgetconstraints(you cannot spend more than you have!)their right to refuse to pay for the good

If the event of a negative response, the reason must be recorded

a zero valuation is implied if:the respondent may not be able to pay anything; or

the respondent may not be willing to pay anything.

a protest bid is implied if:

the respondent may find it too difficult to establish a monetary

valuation;

the respondent may disapprove of the concept of expressing

environmental resources in monetary terms; or may be hostile


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Format of WTP question Open Ended:

How much are you willing to pay for public good A?

Bidding Game:

1) Are you willing to pay X for public good A?

2a) If Yes to (1), Are you willing to pay Y for public good A? (Y>X)

3a) If Yes (2a), Are you willing to pay Z for public good A? (Z>Y).

4a) if Yes to (3a) If No to (Na), WTP questions stop.

2b) If No to (1), Are you willing to pay T for public good A? (T


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Dichotomous or Discrete ChoiceCV (Referendum format):

Are you willing to pay X for public good A? => STOP

Dichotomous or Discrete Choice CV with follow-up:

1) Are you willing to pay X for public good A?

2a) If Yes to 1, Are you willing to pay Y for public good A? (Y>X)=> STOP

2b) If No to 1, Are you willing to pay Z for public good A? (Z STOP


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Respondent simply asked to state maximum WTP for a specific

environmental change

The advantagesof the open ended:

Quick and easy to administer and analyse;

Can be performed with a smaller sample size;

Avoids anchoring effects - respondents influenced by

suggested starting value.

Main drawbacks:

Makes strategic bias, more likely

The respondent may need a reference point to bound value

judgement

Respondent must be familiar with the affected commodity in

CVM: Stage 2 - Survey Design - Open-ended Elicitation Format


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range of values for the max WTP of individuals pre-set.

sample of respondents is divided into sub-samples.

value within the pre-set range is assigned to each sub-sample (the

source of he so-called anchoring effect).

Each respondent asked whether WTP assigned value for proposedchange

Answer not the max WTPonly consent or refusal to pay a given amount

Random utility theory (logit model) are required to estimate the

respondents mean and median WTP values. Requires large sample.

No Incentive to engage in strategic behaviour.

Easier to convey decision rule - >50% say yes change provided.

Realisticindividuals typically make decisions faced with fixedprices.

CVM: Stage 2 - Questionnaire Design - Dichotomous Choice or

Referendum Elicitation Format


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CVM: Stage 2 - Survey Design - DC Format: An Example

After describing their illness, the respondent was given the following valuation

question:

We are now going to ask you a hypothetical question. Suppose you were told that,

within the next few days, you would experience a recurrence of the illness episode

that you have just described for us. What would it be worth to you that is, how

much would you pay to avoid the illness episode entirely?

Remember that you are paying to eliminate all of your pain and suffering, yourmedical expenditure, the time you spent visiting the doctor or clinic, your missed

work, leisure or daily activities.

Bear in mind if you pay to completely avoid being ill this time, you have to give up

some other use of this money. For example, you may reduce your expenditures for

entertainment or education.

Would you pay dollars to avoid being sick at all?

[I f NO] Would you pay dollars to avoid being sick at all?

[I f YES] Would you pay dollars to avoid being sick at all?

300

100

1,000


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suppose you were told that within the next few days you would have a

recurrence of the respiratory condition that you have just described.Would you be willing-to-pay $10 to avoid the illness episode entirely?

1. NO, I would not be willing-to-pay $10.

2. YES, I would be willing-to-pay $10.

If NO, would you be willing-to-pay $

1.a $9 If YES, then stop; if NO, then go to 1.b

1.b $8 If YES, then stop; if NO, then go to 1.c

1.c $7 If YES, then stop; if NO, then go to 1.d

1.k $0.25 If YES, then stop; if NO, then explain why

CVM: Stage 2 - Questionnaire Design - Iterative Bidding

Elicitation Format


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NOAA Panel Guidelines

Conservative design => better to underestimate WTP

WTP, rather than Willingness to Accept (WTA)

Referendum format (i.e. Yes/No Questions)

Accurate description of the good/scenario => use of focus groupsandpretest of the survey instrument

Reminder of substitute commodities Yes/No follow ups

Checks on understanding and acceptance

Cross tabulations

Sample size circa 500 is a minimum.


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Other important aspects for questionnaire

development (1)

Mail / In Person / On the Phone interview

In person => costly, interviewer bias, time consuming,more accurate, better option if it is difficult to explain thescenario (need pictures), only users if on site

Mail => low response rate, sampling bias => who takesthe survey? Those who are interested in the topic?,limited information, relatively inexpensive

Telephone => relatively inexpensive, limited information,not accurate, response rate, developing countries?

Mail + Telephone

Internet

Computer based instruments


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development (2)

Introduction

Warm-up questions

Questions on the knowledge of the problem / experience with theenvironmental good => USE values, etc

Description of the scenario

WTP question(s) Debriefing questions => why did you vote in favour or against the

program

- Use and Non-Use values investigation => did you vote yes,because (a) you will visit the national park, (b) even if you will nevervisit the national park, you want future generations to visit the park,

etc. Attitudinal questions

Sociodemographic questions. Ask questions on Income at theend of the questionnaire!!! => we dont want to irritate therespondent


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development (3)

Identify protest respondents after the WTP questions (ask why therespondent voted YY, NN, NY, YN)

Analyze the data for the full sample of respondents, then deletethose respondents that show protest behaviours

Income. Try to get an answer to the income question. In developingcountries, sometimes researchers (Cropper, Alberini) ask a list of

expenditures. If you have no information on income from somerespondents, dont loose those observations. Add a dummy equal to1 for those that did not answer the income question, and 0otherwise. Set equal to 0 the income of those respondents that didnot answer the income question. In your regression the coefficient ofthe dummy for those that did not answer the income question tells ifthey are statistically different from those that reported income. In thisway you dont loose the observations!

Clearly define the population of interest

Consider your budget constraint

Make sure that your referendum question avoids free rider

behaviours!


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Payment vehicle Whose welfare are we interested in?

=> Important for sampling plan

TAX => One time Tax is incentive compatible How do we choose the tax level? Focus groups, previous

research, pretest, optimal bidding design literature, cost of the

public program

Percentage of YES responses to the bid

0

20

40

60

80

100

5 15 20 40 60 80 100 150

TAX

Percent

ageofYES

If Data are not as

Shown, use Non-

Parameteric

Methods


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CVM: Stage 2 - Questionnaire Design - Payment Vehicle

Valuation question needs a realistic institutional context - usually an

appropriate payment (or bid) vehicle(instrument). The payment vehicle is

the mechanism through which the WTP/WTA values are to be

raised/distributed.

Key considerations when selecting a payment vehicle are:

familiaritydoes the respondent understand the payment vehicle?credibilitydoes the payment vehicle represent a realistic situation?

empathyis the respondent favourably or unfavourably disposed

towards the recipient of the funds?

feasibilityis the recipient of the funds capable of delivering theimprovement?

universalitywould all the respondents be affected by the payment

vehicle?


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WTP and WTA The goal of contingent valuation is to measure the compensating or

equivalent variation for the good in question. Both compensatingand equivalent variation can be elicited by asking a person to reporta willingness to pay amount. For instance, the person may be askedto report his WTP to obtain the good, or to avoid the loss of thegood. Formally, WTPis defined as the amount that must be takenaway from the persons income while keeping his utility constant:

where Vdenotes the indirect utility function, yis income, pis avector of prices faced by the individual, and q0and q1are thealternative levels of the good or quality indexes (with q1>q0,indicating that q1refers to improved environmental quality). Zis avector of individual characteristics.

(Compensating variation is the appropriate measure when theperson must purchase the good, such as an improvement inenvironmental quality. Equivalent variation is appropriate if theperson faces a potential loss of the good, as he would if a proposedpolicy results in the deterioration of environmental quality.)

);,,();,,( 01 ZZ qpyVqpWTPyV 1)


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Willingness to accept(WTA) is defined as the amount of moneythat must be given to an individual experiencing a deterioration inenvironmental quality to keep his utility constant:

Where q2indicates a deterioration in quality compared to the statusquo, q0.

In equations (1) and (2), utility is allowed to depend on a vector ofindividual characteristics influencing the tradeoff that the individual is

prepared to make between income and environmental quality. Animportant consequence of equations (1) and (2) is that WTP or WTAshould, therefore, depend on (i) the initial and final level of the goodin question; (ii) respondent income; (iii) all prices faced by therespondent, including those of substitute goods or activities; and (iv)other respondent characteristics.

Internal validityof the WTP responses can be checked byregressing WTP on variables (i)-(iv), and showing that WTPcorrelates in predictable ways with socio-economic variables.

);,,();,,( 02 ZZ qpyVqpWTAyV

2)


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Dichotomous-Choice Contingent Valuation

When dichotomous choice questions are used, the researcher doesnot observe WTP directly: at best, he can infer that the respondents

WTP amount is greater than the bid value (if the respondent is infavor of the program) or less than the bid amount (if the respondentvotes against the plan), and form broad intervals around therespondents WTP. To estimate the usual welfare statistics, it isnecessary to fit binary data models.

The simplest such models assume that an individuals response tothe WTP question is motivated by an underlying, and unobserved,WTP amount, which is normally (logistically) distributed. Formally,let WTP* be the unobserved WTP:

Where is both mean and median WTP, is a zero-mean normal

(logistic) error with mean zero. The model is completed byspecifying the mapping from the latent variable to the observables:

4) WTPi=1 iff WTPi*>B and WTPi=0 iff WTPi*B

where Bis the bid that was assigned to respondent i, WTP = 1means that the response is a yes, and WTP = 0 means that the

response to the payment question is a no.

iiWTP *

3)


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Because we observe discrete outcomes, we must derive the

probabilities of yes and no responses. When attention is

restricted to a normal latent WTP, the probability of a yes response

is, therefore:

Because /is a standard normal variate,

where () is the standard normal cdf. If we define =/and

=-1/, the probability of a yes response can be rewritten as:

6)

Equation (6) is the contribution to the likelihood by a yes

observation (or a one) in a probit model with the intercept and oneregressorthe bid. As long as is identified and estimablewhich

requires that the bid amount be varied to the respondents in the

survey, so that it becomes a legitimate regressor in the probit

modelmean/median WTP is estimated as:

7)

)Pr()|1Pr()|Pr( * iiiii BWTPBWTPByes

iiii

BB Pr)Pr(=5)

ii BB1

)()|Pr( ii BByes

/


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while the standard deviation of WTP is estimated as:

8)

The same formulae produce estimates of mean/median WTP and of

the scale parameter of WTP from the logit coefficient if WTP is

assumed to be a logistic variate.

A standard probit routine will automatically produce standard errors

for and , but not for and .

To obtain the covariance matrix of and , you can use the delta

method (Cameron, 1991). First calculate the covariance matrix of and produced by the

probit routine V:

9)

where , and , with () thestandard normal probability density function (pdf).

Next, compute the matrix G:

10) G =

/1

V

w zB

B Bii

i ii

n

( )1

21

1

z Bi i

w z z z z i i i i( ) ( ) { ( )[ ( )]} 2 1

1 0

12 2/

/ /


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Finally calculate the matrix product V1=GVG, with V1the covariance

matrix of and . Nb This can be done in LIMDEP.

If WTP is assumed to be a logistic variate, the steps required for the

delta method are the same, except that w(z)in expression (9) isequal to exp(zi) / [1 + exp(zi)].

in some studies, depending on the frequencies of the yes and no

responses to the payment questions, formula (7) produces a

negative mean/median WTP figure.

Perhaps a better way to avoid this problem is to work with a WTPdistribution that is defined only over the positive semi-axis. The

Weibull and the lognormal are examples of such distributions.

The cdf for a Weibull with parameters (>0) and is

Mean WTP is where () is the gamma function

Median WTP is

The log likelihood function becomes:

11)

where F is the cdf of the Weibull

F y e y( ) ( / ) 1

1

1

/1)]5.0ln([

n

i

iiii BFWTPBFWTP1

),;(log)1()),;(1log(


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median WTP is generally regarded as a robust, and conservative,

welfare statistic associated with the good or proposed policy. It is

usually estimated more precisely than mean WTP, and is interpreted

as the value at which 50% of the respondents would vote in supportof the program, and hence the cost at which the majority of the

population would be in support of it.


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The Double Bounded Dichotomous Choice model

Double bounded models increase efficiency in three ways:

YN and NY answers bound WTP

NN and YY answers further constrain WTP

The number of observation is increased

The log likelihood function becomes:

where WTPHand WTPLare the lower and upper bound of the interval

around WTP defined above, F() is the cdf of WTP, and denotes

the vector of parameters that index the distribution of WTP. (Notice

that for respondents who give two yes responses, the upper boundof WTP may be infinity, or the respondents income; for respondents

who give two no responses, the lower bound is either zero (if the

distribution of WTP admits only non-negative values) or negative

infinity (if the distribution of WTP is a normal or a logistic.))

log log ( ; ) ( ; )L F WTP F WTPH Li

n

1


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Non parametric models for contingent

valuation: the Turnbull estimator1. Consider only the first bid answer

2. For bids indexed j=1,,M, calculate Fj=Nj/(Nj+Yj) where Njis thenumber of No responses to tjand Yjis the number of Yesresponses to the same bid, Tj= Nj+Yj

3. Beginning with j=1, compare Fjand Fj+1. Intuitively, % of Nosshould increase with the increase in the bid

4. If Fj+1>Fjthen continue5. If Fj+1Fjthen pool cells j and j+1 into one cell with boundaries

(tj,tj+2], and calculate Fj*=(Nj+Nj+1)/(Tj+Tj+1)=Nj*/Tj*. That is,eliminate bid tj+1 and pool responses to bid tj+1with responses tobid tj.

6. Continue until cells are pooled sufficiently to allow for amonotonically increasing CDF

7. Set FM+1*=1, F0*=0

8. Calculate the PDF as the step difference in the final CDF:

fj+1*=Fj+1*-FJ* for each offered price. These represent consistentestimates of the probability that WTP falls between price j andprice j+1.


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9. Multiply each offered price (tj) by the probability that WTP falls

between it and the next highest price (tj+1)

10. Sum the quantities from step (9) over all prices to get an estimate

of the lower bound on WTP:

11. Calculate the variance of the lower bound as:

)()( *

0

*

1 j

M

j

jjLB FFtWTPE

*

1

2

1*

**

)()1(

))((M

j

jj

j

jj

LB ttT

FFWTPEV

environmental economics -contingent_valuation

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