Measuring Benefits: Methods Contingent valuation method

1. Measuring Benefits: Methods Contingent valuation method How much pollution is too much?

2. General approaches • Estimating the benefits of environmental improvements can be approached in two ways: • Measure what people say (stated preference approach), and • Measure what people do (revealed preference approach). • Contingent valuation is a stated preference approach.

3. Contingent valuation method (CVM) • CVM involves the use of surveys to estimate a market demand for a public good. • Elicit the willingness to pay (WTP) for an improvement in environmental quality, or • Elicit the willingness to accept (WTA) for a specified degradation of environmental quality. • Many examples of CVM exist: • National water quality benefits, • Air quality improvements in the Four Corners area, • Rafting in the Grand Canyon, • Exxon Valdez oil spill.

4. Typical elements for CVM • 1) A scenario or description of the policy or event that the respondent is asked to value or ‘vote’ on. • Should give a clear picture of the good the respondent is asked to value. • Details the benefits if the respondent votes ‘yes’, and the associated costs. • 2) A mechanism for eliciting value from the respondent. • Open-ended: ‘How much would you be willing to pay for (policy)’? • Bidding: “Would you be willing to pay $5? What about $10? • Voting: “The government is considering policy X. Your taxes would rise by $Y if this happens. How would you vote?’

5. Typical elements for CVM • 3) Socioeconomic characteristics of respondents, including and questions that help evaluate validity and reliability. • Age, race, sex, income, education, etc. • Attitudes toward the environment, • Follow-up questions to see if respondent believed the scenario information and takes the exercise seriously.

6. Case study: Exxon Valdez

7. Case study: Exxon Valdez oil spill • March 24, 1989: oil tanker passing through Valdez Narrows to Prince William Sound. • Strayed from normal shipping lanes, ran into rocks. • Released 11 million gallons of crude oil into the sound. • Question: what are the damages to passive use value?

8. Case study: Exxon Valdez oil spill • Passive use value is also termed existence value or nonuse value. • It is the value we place on an environmental public good, even if we never personally enjoy it or view it. • Active use value, by contrast, is the value we place on goods when we interact directly with the environment (boating, fishing, hiking, bird watching)

9. Case study: Exxon Valdez oil spill • Outline of study • Survey design • Results • Postscript on the Exxon settlement

10. Survey design • Developed over an 18-month period. • In-person national sample. • Describes physical damages caused by oil spill. • Elicits values people place on preventing a similar accident in the future in the Prince William Sound.

11. Survey design • Tested questionnaire with focus groups, informal field testing, and four pilot surveys. • Goal: estimate a dollar value of the loss of personal welfare as a result of damages caused by the spill. • Design issues: • Survey method • Nature of payment vehicle • Timeframe for collection of payments

12. Survey design • Survey method: personal interview • Respondents informed about the effects of the spill, and the escort ship program that could prevent a future spill. • Payment questions: yes-no for a specific cost. • Ex: would you be willing to pay $x to prevent another spill of the same magnitude? • Lump-sum payment instead of installment.

13. Effects of the spill • Respondents shown photos of Prince William Sound from the air. • Impact on wildlife described, including number of species affected and birds killed no photos provided).

14. Extent of oil spill • The oil slick (blue areas) eventually extended 470 miles southwest from Bligh Reef. The spill area eventually totaled 11,000 square miles. (Source: Exxon Valdez Oil Spill Trustee Council)

15. Cleanup • Shoreline treatment from the Exxon Valdez spill. (Source: Exxon Valdez Oil Spill Trustee Council)

16. Beach washing • Some of the fees paid by the oil and gas industry pay for government activities such as oil spill cleanup. Pictured here is beach washing after the Exxon Valdez oil spill. (Source: Exxon Valdez Oil Spill Trustee Council)

17. Wildlife impacts • Sea birds killed by the Exxon Valdez oil spill. (Source: NOAA)

18. Estimating WTP • WTP elicited in terms of a vote for or against the escort ship program at a cost of a one-time Federal tax. • Four versions of the cost amounts were used.

19. Eliciting WTP • Four versions of the cost amounts were used; each has a different starting point. • Version A-15 randomly assigned. • If ‘yes’, ask higher amount (A-16). • If ‘no’, ask lower amount (A-17).

20. Sampling • 61 counties selected from the 50 states, • 334 Census block groups drawn from the counties (selected with probability proportional to population), • 1,600 dwelling units selected from the blocks. • Dwelling units randomly assigned to one of the four versions of the questionnaire.

21. Sample weights • Results weighted to reflect 1990 Census. • Weighting variables: region, race, age, household size, household type.

22. Bidding results

23. Marginal willingness to pay

24. Average WTP and Total WTP • Researchers used a statistical model to construct the distribution of values. • Median WTP = $30. • Number of English speaking households = 90,838,000. • Total WTP = $30 * 90,838,000 = $2.7 billion (1990 dollars). • What does this figure mean?

25. Exxon Valdez postscript • State of Alaska and U.S. Government settled lawsuits against Exxon for $1 billion in natural resource damages and restitution for injuries. • Exxon also spent more than $2 billion on cleanup and restoration. • In addition, private claims remain unsettled.

26. Economic impacts • Cost of cleanup • Cost of restoration • Recreational sport fishing losses: $4 million - $50 million. • Tourism impacts: negative and positive. • Replacement cost of birds and mammals: thousands per marine mammal, hundreds per terrestrial animal, $100s-$1000s for each bird. • Passive use value - $2.7 billion and above.

27. Sources of bias in CVM studies • Hypothetical bias, • Free-riding, • Strategic bias, and • Embedding bias.

28. Hypothetical bias and free-riders • If the event is hypothetical, how can we trust that the survey responses are a true measure of WTP? • Survey must describe a scenario that seems real as possible to respondents. • Payment details must be clear, and tied to the provision of the public good. No payment, no public good. • Open-ended questions are a poor approach.

29. Strategic bias • Respondents may have incentive to inflate WTP if they believe: • They won’t have to pay, and • The polluter will have to pick up most of the cost. • In Exxon study, respondents were told that both oil companies would pay a one-time tax and the public would pay a one-time tax for the escort ship program.

30. Embedding bias • Responses can be sensitive to the context and ordering of questions. • What is it respondents are really valuing? A particular type of fish? • All fish? • The environment in general?

31. Embedding bias • Exxon study: CVM study must present a plausible choice that describes what the respondent will get and will not get for a payment. • Chose to present a single policy alternative to potential pollution (escort ship). • A vote ‘yes’ means taxes are raised to pay for the policy alternative; a vote ‘no’ means the policy is not pursued.

32. CVM • CVM has been used in thousands of studies and publications. • CVM is the only means to estimate passive use value (existence value). • Under CERLA* (Superfund Act), federal court has ruled that passive use losses are compensable. • *Comprehensive Environmental Response, Compensation and Liability Act of 1980.

33. Criticisms of CVM • 1) What people say can differ from what they do (free riders, strategic bias); actual WTP can be very different from estimated WTP. • 2) Scoping problem: WTP estimates are not sensitive to the environmental good in question (the value for one lake could be the same value for all lakes). • 3) CVM results can be dependent on the information provided to respondents. Can we expect people to value creatures they never heard of before the survey?