I. Introduction
1.1
Definition
1.2
Rationale
II. Types
of valuation technique
2.1
Direct cost
2.2
Revealed demand
2.3
Bidding game
III. Hypothetical
question modes
IV. Application
and case studies
4.1
Case study one: Salmon restoration
4.2
Case study two: Water allocation in Mono lake, California
4.3
Forest preservation in Australia
4.4
Coastal Water Quality: A contingent approach
4.5
The Referendum Format Contingent Valuation Method
V. Conclusion
VI. References
I. Introduction
Contingent valuation is a method of estimating the non market value of environmental attributes or amenities such as values of a grand canyon, endangered species or recreational or scenic resources etc. These values are generally measured based on the willingness to pay for improved environment or the willingness to accept compensation for damaged environment or to accept a condition of being deprived of the improved environment. The most appealing aspect of the contingent valuation method is that it allows us to estimate total value rather than components of that total value ( Frykblom,1997). For more information, please click here!
The non market value of environmental goods is categorized into three components, existence, option and bequest values. An existence value is the value the public are willing to pay to some specific environmental amenities or scenic resources in order to keep them from being extinct or damaged. Valuers are not concerned about whether or not they will see or use them in the future. They just want to know that they exists. For instance, some people might have never seen rain forests or whales, but they are very concerned about their current status. They want them to exist even they don't know if in their lives they can use or see them (Knight and Bates, 1995).
In this case, contingent valuation will ask you how much you are willing to pay to preserve them from extinction. The amount you would be willing to pay depends on how strong you feel about your encountering with the animal. How strongly you want your children or grand children to enjoy them. The value you give based on your recreational experience to preserve the elephants, in this case, is the bequest value because you seem o be less concerned about your own opportunity but about your children and future generation.
Finally, the option value of any environment amenity, is the value that the public are willing to pay to preserve it for future use but they are not sure when they are going to use it. You might hear people said about how smart and friendly a whale is. You are strongly want to see them sometime in the future. And for the time being, there are reportedly two whales remaining in the water world today. Let's assume you are told that the remaining two whales, one in the Pacific Ocean and other in another ( I don't know where she is now) will be killed due to the very compulsory experimentation for any scientific breakthrough for future economic development. How would you feel about this information. I am sure you don't really want them to be killed for whatever reason, do you? They are not many now, and the possibility that they could repopulate the water world is null as they both are now in different locations and no chance to meet each other at all. While you are very keen to sight the animal sometime in the near future, there was a survey asking you how much you are willing to pay in order to reserve your future opportunity to see them or you are deprived off this chance forever. The answer you give to this question no matter how much it is, is the option value that you are personally willing to pay to save the animal.
Why the method is appropriate and for what purpose it is well known in planning and decision making related to environmental or sustainable natural resources conservation and management. The old resources management paradigm has produced social consequences and externalities. For instance, the traditional resources management that has purely based on market benefits as the main value component in the benefit cost analysis for policy making has proved unsustainable for the long run. As result, the integrity of surrounding ecosystem (environment) has been severely damaged. Ozone depletion, global warming, acid rain and other hazardous pollutants extinction of species etc. have resulted from the negative impacts of human activities on the natural environment or ecosystem in general. This consequences, some are irreversible have awakened some scientists, economists and management authorities to explore other alternative approach to better manage our remaining resources before it is too late. Several ecological and environmental economic philosophies have subsequently emerged for consideration in decision making about the resources management, especially the alternative way of valuing the natural resources or environment attributes, that is, the contingent valuation method.
Robert Constanza in his article about ecological economics said " there is an increasing awareness that our global ecological life support system is endangered, and that decision made on the basis of local, narrow, short term criteria can produce disastrous results globally. Societies are becoming to realize as well that traditional economic and ecological models and concepts fall short in their ability to deal with these problems." ( in Knight and Bates, 1995, p.323)
In his article about shifting and broadening the economic paradigm toward natural resources, Loomis points out the following:
The contingent valuation
has, then, seen practiced widely in providing information for resources
management policy. Among its poplar roles, the contingent valuation has
been used in benefit cost analysis of many environmental regulations or
program whose implementation might have significant impacts on the environment.
It allows another new value component of the resources, the non market
value of resources that has been neglected in the old management paradigm
to be incorporated in the decision making process.
II. Types of valuation technique
There is a number of techniques that have been used in the contingent valuation approach to estimate the non marketed value of any specific environment amenity or scenic resources. For the purpose of this paper, I would discuss three valuation techniques that are currently practiced in non marketed valuation of environmental goods or in other word, the public goods. These include direct cost, revealed demand and bidding game.
It is
a method of estimating the non marketed benefit of reduced environmental
damage based on direct estimate of the cost to be projected from that damage.
These costing technique is practically challenging. Unavailability of information,
pricing and accounting problems inherent in the analysis has made it difficult
to put the method into widely use. It would be even more difficult if you
are trying to apply this technique in the valuation of aesthetic environmental
improvement, since the cost of aesthetic damage is not explicitly
reflected in the market (Randal et al, 1974).
Originally, the direct costing
technique has seen practiced in flood control projects where there
was the strong requirement of the benefit and cost analysis of building
any physical structure such as dams or reservoirs to prevent residential
and agriculture lands from flooding. Before making a decision whether to
implement flood control projects which would, on the one hand very costly
to the society and on the other, would impact on the ecosystem; the benefit
cost analysis was conducted . In calculating the benefit and cost of the
projects, the direct cost technique has been used. The technique allowed
for the estimate of the cost of damage to crops and residential properties
and other inherent costs such as cleaning up cost, rehabilitation, resettlement
costs and so on ( Kneese, 1984). The benefits of the projects would be
extrapolated from the damage aversion. How much the damage by flood would
be, is then translated into the benefits of the flood control projects.
This valuation technique is trying to infer the non marketed benefit from the revealed demand for some appropriate proxy. In the case of reduced air pollution, the revealed demand for residential land is related to the concentration of air pollution (Randal et al, 1974). To understand the concept of this technique, let's look at a simple example of noise pollution from a nearby airport. Here, we assume there are two houses that are very similar in everything except location, as one is located close to the airport, and the other is located in very peaceful and quiet environment. Could you guess which one would be more expensive? The price of the house close to the airport must, of course, be lower than that of the other which is not; unless you enjoy noisy environment or enjoy watching airplanes taking off and landing. From this example you can see a difference in price of these very similar houses. If the house were not located close to the airport, it would have the same price. In other word, if the noise pollution is abated, the benefit from that abatement would be the price difference.
It is also a technique of
estimating the non market benefit of improved environmental quality or
establishment of recreation sites. Through this method the respondents
will be asked " to answer yes or no to the
question: would you continue to use this recreation area if the cost
to you was to increased by X dollars? The amount is varied up and
down in repetitive question, the highest response will be recorded. Individual
response may be aggregated to generate a demand curve for recreation services
provided by the area". (Randal et al, 1974, p.443).
In a simple sense, the bidding
game would ask the respondents to react to varying bids. The bids will
be raised or lowered until the respondents switch their reaction from the
point of inclusion to exclusion. In order to make the response more reliable
and stable, the respondents must be the consumers of the product rather
than the potential ones. The technique becomes more dependable if the survey
is conducted at the recreation sites where respondents are currently engaged
in the activity (Knetsch and Davis, 1966).
III. Hypothetical question modes
There are several questions
that have been used both in a control experiment and in practice. Among
those are dichotomous, open ended, payment card and bidding game.
Dichotomous choice is a bid offered to the respondent that he/she can
accept or reject, while in the open-ended question the respondent
is, on the other hand, asked for his or her maximum willingness to pay
for something that are of his or her most interest, in this case, the improved
quality environment.
Payment card is another
mode of question used in contingent valuation. The card is shown to the
respondent with several bids printed on it. The respondent is asked if
any of those bids is close to his/her maximum willingness to pay. And finally,
the bidding game is refereed to the sequence of bids offered to the respondent
so that his or her maximum willingness to pay can be elicited." (Frykblom,
1997).
IV. Application and case studies
A contingent valuation method must be applied in a clear context, and services the provided by any improved environment attributes have to be made known to respondents involved in the process of valuation. Emphasis must also me paid on the design of the survey. Some aspects that could potentially affect the outcome of the contingent valuation method must be taken into consideration. Educational attainment and income level of respondents have great impacts on the willingness to pay for any improved environment quality. This case is most evident in most developing countries where people are too poor to think about environmental protection or improvement.
4.1 Case study one: Salmon restoration
This case study illustrate the benefit cost of demolishing the hydro-electric dams to allow free passage of salmon. Salmon is an anodronomous species which require long reproductory migration. Since the construction of the dams, migratory routes has been blocked and as result salmon population have been drastically declined.Click here to the case study!
4.2 Case study two: Water allocation in Mono lake, California
This case study will highlight
the use of contingent valuation method in the estimating the willingness
to pay of the local residents to preserve endangered species that are threatened
by negative change in their habitat. Mono lake one among many other water
bodies that have suffered ecological change due to economic development
activities during the past decades. In the case of lake Mono, the main
issue is the allocation of water use. Redistribution of water sources that
feeds the Mono lake to another new user, in this case to Los Angeles has
affected the in-stream flow which result in change in water habitat such
as low flow rate, increasing water temperature, polluting river bed etc.
As result, the food supplies of migratory birds have been decreased, thus
threatening the existence of the birds. Click
here to the case study.
4.3 Forest preservation in Australia
This case study would help
illustrate the use of contingent valuation in providing information to
decision making about whether to keep unprotected forest area from lumber
and create it as the forest reservation. The contingent valuation was used
to try to quantify the non marketed benefit of the potential forest reserve.
After the valuation process, it was found that the benefit from precluding
the unprotected forest from timber exploitation outweighs the cost and
benefit from the timber. The positive net present value is of $ 543 millions
for preserving the forest. This case study can be
accessible through the following fee based web address:
http://www.idealibrary.com/links/artid/jema.1993.1042
4.4 Coastal Water Quality: A contingent approach
In this case study the contingent
valuation was used to estimate the non marketed benefit of two environmental
goods: 1.) improved water salubrity and 2.) preservation of ecosystem against
eutrophication.
The study has found that
whatever environmental goods, the willingness to pay was observed to rise
with income of the respondents. This case has been very evident in most
developing countries where people are most concerned with their daily struggle
to sustain their lives. The people are so poor to think about the quality
environment. To the rural poor in most developing nations,
environmental protection would take the back seat while on the front one
they are struggling to find enough food to just survive for the day ( Kolstad,
2000). If they were asked for their willingness to pay for environmental
protection or pollution abatement, they would say that those are not their
immediate concerns. The result will, therefore, be underestimated or zero
value will perhaps be placed on the environmental protection.
The study has also found
that the willingness to pay for the salubrity was affected by the environmental
sensibility and awareness. In this case, the respondents' willingness to
pay depends very much on information about negative effects and the current
level of pollution. If they are not aware of being currently affected by
this pollution, they tend to, of course, undervalue the non marketed benefit
of environmental improvement. Finally, the willingness to pay for the preservation
of the ecosystem was, on the other hand, very related to the level of educational
attainment of the respondents. The more the respondent has been educated,
the higher value they tend to place on the preservation of the ecosystem
and vice versus. This case study can be accessible
through the following fee based web address:
4.5 The Referendum Format Contingent Valuation Method
This case study on Household's Valuation of Alternative Levels of Hazardous Waste Risk Reductions illustrates the use of another form of contingent valuation, the mail questionnaires, to estimate household's willingness to pay to reduce risk of premature death from hazardous waste in the environment. The result is similar to the contingent valuation that uses person interview (Pierre du Vair and John Loomis, 1999 ) This case study can be accessible through this following fee based web address: http://www.idealibrary.com/links/artid/jema.1993.1060
V. Conclusion
In conclusion, new emerging issues in the discipline of natural resources and environmental economics requires an alternative system of decision making that has no longer based purely on marketed values of natural resources but included the non marketed value in the total value component of the resources. To this end the contingent valuation ranges the most promising and exhaustive method of estimating this non-marketed benefit. Since the non market value of the environment or natural resources in particular has been included as the main part of the total value component in benefit cost analysis, the information based on which the decision is made would produce a comprehensive and sustainable management plan. Unlike the traditional pure benefit cost analysis, the contingent valuation has involved affected communities in the process of valuation. The result would, therefore, be comparatively politically feasible.
VI. References
1. Alan Randal, Berry Ives and Clyde Eastman (1994), Bidding Games for Valuation of Aesthetic Environmental Improvement, Journal of Environmental Economics and Management ,1, August, 132-49
2. Charles D. Kolstad (2000), Environmental Economics, Oxford University Press
3. Jack l. Knetsch and Robert K. Davis (1966), Comparison of Methods
for Recreation Evaluation, in Allen V. Kneese and Stephen C. Smith (eds),
Water Research, Baltimore: Johns Hopkins Press for Resources for the Future,
125-42
4. Loomis, J. 1996. “Measuring the Benefits of Removing Dams and Restoring
the Elwha River: Results of a Contingent Valuation Survey,” Water Resources
Research 32(2):441-447.
5. Michael Lockwood, J.Loomis and T. Delacy, A contingent Valuation Survey and Benefit -Cost Analysis of Forest Preservation in East Gippsland, Australia. Journal of Environmental Management (1993) 38, 233-243
6. Ph. Le Goffe ( 1994). The Benefit of Improvement in Coastal Water Quality: A contingent approach. Journal of Environmental Management (1995) 45, 305-317.
7. Peter Frykblom, Hypothetical Question Modes and Real Willingness to Pay, Journal of Environmental Economics and Management (1997) 34,275-287.1.
8. Richard L. Knight and Sarah F. Bates ( 1995). A new Century for Natural Resources Management. Island Press: Washington DC 20009.
9. Wallace E. Oates (1994), The Economics of the Environment, Edward
Elgar.