This is a survey- based method frequently used for placing monetary values on environmental goods and services not bought and sold in the market places. It is also known as the stated preference approach. Contingent Valuation (CV) Method is usually the only feasible method for including passive use considerations in an economic analysis, a practice that has engendered considerable controversy.
The issue of what a CV study tries to value is first addressed from the perspective of a policy maker and then the controversy over the inclusion of passive use is taken up in more details. The major uses and positions taken in the technical debate over the use of CV are summarized from a user‟s perspective. Key design and implementation issues involved in undertaking a CV survey are examined and the reader is provided with a set of factors to examine in assessing the quality of a CV study.
A CV survey constructs scenarios that offer different possible future government actions. Survey respondents are then asked to state their preferences concerning those actions. The choices made by the survey respondents are then analyzed in a similar manner as the choices made by consumers in actual markets. In both cases, economic value is derived from choices observed either in an actual market or in the hypothetical market created in the survey.
Under the simplest and most commonly used CV question format, the respondent is offered a binary choice between two alternatives, one being the status quo policy, the other alternative policy having a cost greater than maintaining the status quo. The respondent is told that the government will impose the stated cost (e.g. increased taxes, higher prices associated with regulation, or user fees) if the non status quo alternative is provided. The key elements here are that the respondent provides a “favor/not
A Contingent Valuation Study stimulates missing markets by asking people hypothetical questions about their Willingness to Pay (WTP) for a community. The valuation is then conditioned on the good being obtainable only if WTP covers the costs of production, and on the respondent thus loosing the opportunity to consume other goods for an amount equal to their stated WTP. The method is theoretical valid (i.e. individual characteristics and other factors affects WTP according to what would be expected. It also has a convergent validity (i.e. It produces results similar to those of other valuation techniques or result that differs from those obtained by other methods in a predictable way.
A CV method has been applied in the valuation of a number of goods and services where competitive market price does not exist. Example of studies in Health care include WTP for enrolment in an asthma management program and for antenatal care and as well as for priority setting between two life saving health care programmes and hip operations. The WTP for risk reductions in various areas has been estimated.
A CV Survey can create an idealized market for a pure public good whereby respondents face a choice between two different quantities of the good. The usual example is the status quo level of the good versus an alternative level that will entail a specified cost increase. Any particular good can have both direct use and passive use values. The exact dividing line between direct and passive use is to some degree dependent upon knowledge of physical and biological lineages upon what activities of consumers are observed. For instance, while swimming in a lake obviously involves direct water contact, connecting the distant wetlands necessary to support a duke hunter may be difficult. Even in the quintessential example of lost passive use, harm from the Exxon Valdex spill to households outside Alaska, household news watching behavior was influenced by spill coverage (Carson, 1999).
The Contingent Valuation Method (CVM) is used to estimate economic values for all kinds of ecosystem and environmental services. The method has greatly flexibility, allowing valuation of a wider variety of non markets goods and services that are possible with any other non markets valuation technique. It can be used to estimate both use and non use values, and it is the most widely used method for estimating non use values. It is also the most controversial of the non market valuation methods.
The Contingent Valuation Method involves directly asking people, in a survey how much they would be willing to pay for specific environmental services. In some cases, people are ask for the amount of compensation they would be willing to accept to give up specific environmental services. It is called
“contingent” valuation, because people are asked to state their willingness to pay, contingent on a specific hypothetical scenario and description of the environmental service.
The Contingent Valuation Method is referred to as a “stated preference” method, because it asks people to directly state their values, rather than inferring values from actual choices, as the “reveled preference” methods do. It circumvents the absence of markets for environmental goods by presenting consumers with hypothetical markets in which they have the opportunity to pay for the good in question. The hypothetical markets may be modeled after either a private goods market or a political market.
The fact that contingent valuation is based on what people say they would do, as opposed to what people are observed to do, and is the source of its greatest strengths and its greatest weaknesses.
Contingent valuation is one of the only ways to assign dollar values to non use values of the
basic life support functions associated with ecosystem health or biodiversity, to the enjoyment of a scenic vista or a wilderness experience, to appreciating the option to fish or bird watch in the future, or the right to bequest those options to your grandchildren. It also includes the value people place on simply knowing that giant pandas or whales exist.
It is clear that people value non use, or passive use, environmental benefits. However, these benefits are likely to be implicitly treated as zero unless their dollar value is somehow estimated. So, how much are they worth? Since people do not revealed their willingness to pay for them through their purchases or by their behavior, the only option for estimating a value is by asking them questions.
However, the fact that contingent valuation method is based on asking people questions, as opposed to observing their actual behavior, is the source of enormous controversy. The conceptual, empirical, the practical problems associated with developing dollar estimates of economic values on the basis of how people respond to hypothetical questions about hypothetical markets situations are debated constantly in the economics literature. However, contingent valuation researchers are attempting to address these problems, but they are far from getting to the point.