Environmental economic value

Environmental economic value (EEV) can be characterized differently according to the type of economic value arising. It is usual to divide EEV into use and non-use values. Use values relate to actual use of the good in question (for example, a visit to

a national park), planned use (a visit planned in the future) or possible use. Actual and planned uses are fairly obvious concepts, but possible use could also be important since people may be willing to pay (WTP) to maintain a good in existence in order to preserve the option of using it in the future. Option value thus becomes a form of use value. Non-use value refers to willing to pay to maintain some good in existence even though there is no actual, planned or possible use. The types of non-use value could be various, but a convenient classification is in terms of (a) existence value, (b) altruistic value, and (c) bequest value. Existence value refers to the WTP to keep a good in existence in a context where the individual expressing the value has no actual or planned use for him/herself or for anyone else. Motivations here could vary and might include having a feeling of concern for the asset itself (for example, a threatened species) or a “stewardship” motive whereby the value feels some responsibility for the asset. Altruistic value might arise when the individual is concerned that the good in question should be available to others in the current generation. A bequest value is similar but the concern is that the next and future generations should have the option to make use of the good.

Figure 2.1 shows the characterization of EEV by types of value. SP techniques are suited to eliciting all these kinds of value, although in practice it is usually not possible to disaggregate individual types of non-use value, nor is it usually relevant to a decision to secure that breakdown. But differentiating use and non-use values can be important because, as will be seen, the latter can be large relative to the former, especially when the good in question has few substitutes and is widely valued. In addition, non-use value remains controversial, so that it is important to separate it out for presentational and strategic reasons.

Fig. 2.1 Environmental economic values Source: Bateman et. al., 2002

How do stated preferences relate to the concept of EEV? Figure 2.2 shows how the various valuation techniques apply to the major component pats of EEV. Non-use values, which are likely to be especially important in contexts where the good being valued has few or no substitutes, can only be estimated using stated preference techniques. Since non-use values tend not to leave a “behavioral trail”, that is, some behavioral change which affects a price or quantity which can be observed, revealed preference techniques are unlikely to elicit non-values.

Fig. 2.2 The taxonomy of valuation techniques Source: World Bank, 2002

Contingent valuation (CV) is a method of estimating the economic value of non-market environmental goods (and public goods in general) through survey questions that elicit individuals’ preferences. Respondents express their preferences in terms of willing to pay to purchase or restore that good, or, alternatively, what they would be willing to accept to no longer be able to purchase or fully utilize that good.

To elicit these values, individuals are presented with a hypothetical market for the good, thus the resulting “willingness to pay” and “willingness to accept” values are contingent upon the interviewer’s description of the hypothetical market, and the approach became known as the contingent valuation method.

The major advantage of this approach compared to proxy methods, such as Hedonic price method, Travel cost method and so on, is that the CV method can elicit both use and non-use values, and indeed it is the only possible technique for the evaluation of non-use values. Another attraction of this method is that it may be applied at varying levels of complexity according to the time and financial resources available for the research and according to the mode of survey used to capture the individual’s value.

2.3 Reviews for Contingent Valuation Method

CV asks consumers to directly state their values within a hypothetical context rather than inferring values from actual market behavior, it is perhaps the most controversial of all methods used to value non-market environmental goods. Of course, CV is not the only empirical method that uses data from surveys; many large data sets commonly used by economists consist of survey data (i.e. census surveys, consumer expenditure surveys).

CV surveys differ from traditional data surveys in that the respondents are asked to make a hypothetical value trade-off rather than simply report their own characteristics or actual expenditures. The hypothetical nature of CV introduces unique challenges when respondents do not correctly understand the good or service being valued, or when they cannot accurately state their willingness to pay in monetary terms. Nonetheless, as mentioned earlier, CV is the only economic method available for measuring non-use values associated with nature.

There are many researches regarding CVM in Taiwan, but few are in transportation field. These are national park effect (Wu, 2005), leisure effect (Jeng, 2003), wildlife conservation economic effect (Lo, 2003), water quality improvement effect (Hung and Shaw, 2005) and air quality improvement effect (Shaw et. al., 1996).

Transportation researchers may employ CVM in related fields.

2.3.1 Economic Concept of CVM

The CVM is a technique that allows the value of an environmental good or service to be estimated. Individuals are asked to value their willingness to pay (WTP) or willingness to accept (WTA) for a change in the provision of an environmental good, usually by way of a questionnaire survey. The individual maximum WTA or the minimum WTA compensation for an environmental change is assumed to be the value the individual attaches to such a change.

An individual can be asked to express his/her subjective valuation of possible environmental changes in different ways:

1. Environmental improvement. The value of the environmental improvement in such a situation can be measured either by:

(1) The individual’s maximum willingness to pay (max WTP) to obtain the environmental improvement (estimated by the compensating surplus-CSU); or by (2) The individual’s minimum willingness to accept (min WTA) as compensation to

forgo the environmental improvement (estimated by the equivalent surplus-ESU).

2. Environmental damage. The value of the environmental damage in such a situation can be measured either by:

(1) The individual’s maximum WTP to avoid the environmental damage (estimated by the ESU); or by

(2) The individual’s minimum WTA as compensation to agree to the environmental damage (estimated by the CSU).

One basic issue in CV method studies for the estimation of environmental values is the choice of whether to ask individuals their maximum WTP or their minimum WTA for a given environmental change.

To understand the conceptual difference between the maximum WTP and the minimum WTA, let us focus on the case of the valuation of an environmental improvement. With an environmental improvement the individual, currently at the utility level U0, ceteris paribus, is brought to U1, as shown in Figure 2.1. The maximum amount of money the individual is willing to pay to secure this improvement is such that after the payment s/he would at most be back to U0, (s/he should not be prepared to pay any amount of money such that s/he falls below the utility level U0). This maximum amount of money is the compensating surplus (CSU).

Note: The segments in bold are the budget sets and the points in bold are budget constraints for different levels of environmental good. The good X is money allocated to consumption.

Fig. 2.3 Environmental improvement: compensating surplus and equivalent surplus

If, however, the same individual is already enjoying (or has a right to) the improvement, ceteris paribus, and has the utility level U1, then s/he considers it a loss to have to give up the environmental improvement and asks to be compensated for this loss. To calculate how much to ask as minimum compensation s/he look at the utility level attainable with the environmental damage (that is, without the environmental improvement). This is U0. S/he will then ask at least a monetary compensation high enough to reach the level of utility U0 gain back to the level U1.

This is the equivalent surplus (ESU).

It is apparent that the appropriate measure of the value of an environmental asset is related to the property rights of the individual on such an asset. The CSU measure assumes the individual has no consolidated rights in the environmental improvement, assuming therefore as a benchmark the utility level without environmental improvement U0. The ESU measure assumes instead that the individual somehow deserves, or has a right to, the environmental improvement, and puts the individual at the higher utility level U1 attained (or attainable) with the environmental improvement.

Randall and Stoll (1980), suggested that the possible different between the compensating surplus and equivalent surplus are barely significant in most practical situations. However, Hanemann (1991) shows that this is not always the case, especially when the environmental good/service has no close substitutes. In such cases, the minimum WTA can exceed the maximum WTP several times over. Carson (1991) also argues that when individuals are asked to state their minimum WTA, they tend to state their expectation of the maximum they could hope extract as compensation, rather than their true minimum WTA. On these grounds also Mitchell and Carson (1989) and Pearce and Turner (1990) advise caution on the use of the WTA approach.

From the above discussion, it leads to the following conclusions: WTP measure rather than the WTA measure is the proper measure of value that should be used in the CV studies (Cummings et al., 1986; NOAA, 1993).

2.3.2 Primary Elements of CVM

A contingent valuation survey consists of three primary elements (Figure 2.4).

The first is a carefully crafted description of the good or commodity to be valued.

This description should detail the baseline existing situation, the features of the good itself, its extent or magnitude and duration, the parties responsible for its provision, its expected consequences, a description of a default scenario if the good were not provide, the availability of substitutes for the good, and how it would be paid for. A

thorough examination of the elements required in a commodity description is provided by Fischhoff and Furby (1988). The validity of the CV results depends mainly on the level and nature of information provided to the respondents through the scenarios. The nature of the information provided has been found to affect the results both positively as well as negatively (see Bergsrtom et al., 1990). One crucial question that has not yet been properly addressed in the CV literature is that what is the optimum level of information, since the information provided in the CV scenarios do affect the WTP values.

Fig. 2.4 Primary Elements of CVM

The second primary element in a CV questionnaire is elicitation. The respondent is asked either to provide the actual maximum amount that he would pay for the commodity described (an open-ended response format) or to indicate whether or nor he would vote in a public referendum for it to be provided if it cost hid household a specific dollar amount (the referendum format). The value of the good/service in the CV technique is elicited through an elicitation technique which is an important component of any CV method (Portney, 1994; Mitchell and Carson, 1989). The elicitation technique (or approach) used in CV studies is of different types. As of now, there are four major types of elicitation techniques available in the literature, namely, the bidding game, payment card (PC), open-ended (OE), and dichotomous choice (DC) approach (Boyle et al., 1996). The dichotomous choice approach is further divided into two types as: single-bounded dichotomous choice or take-it; and double-bounded dichotomous choice or take-it-or-leave-it with follow-up. It is a question to choice elicitation technique from above.

The third element of a CV survey are questions that probe respondent characteristics and behaviors that may influence their preferences for the good being valued. Socio-economic information, previous purchasing experience with goods relevant to the commodity in question and indicators of use of the good itself are elicited to provide insight into respondents’ valuation responses. A valuation function is estimated using these indicators that are predicted by economic theory to explain respondent preferences for the good. The better the ability of the data to explain the observed preference information, the greater the confidence in the results of the survey.

2.3.3 Elicitation Method

The value of the good/service in the CV method is elicited through an elicitation technique which is an important component of any CV method (Portney, 1994;

Mitchell and Carson, 1989). The elicitation technique (or approach) used in CV studies is of different types. As of now, there are four major types of elicitation techniques available in the literature, namely, the bidding game, payment card (PC), open-ended (OE) and dichotomous choice (DC) approach (Boyle et al., 1996). The dichotomous choice approach is further divided into two types as: single-bounded dichotomous choice or take-it-or-leave-it; and double-bounded dichotomous choice or take-it-or-leave-it with follow-up. An extended version of the latter approach which is called ‘triple bounded dichotomous choice’ that extends the double-bounded DC ‘for a further question’ has also been used in some of the CV studies (see Bateman et al., 1999). Let us discuss briefly each one of the elicitation techniques mentioned above.

The bidding game is the oldest elicitation technique among all the techniques (Mitchell and Carson, 1989). The bidding game approach goes as follows: the respondent in a CV study would be randomly assigned a particular bid from a range of predetermined bids. The bid assigned may be either a lower or higher level bid. The respondents would then be asked to say ‘yes’ or ‘no’ to that particular bid, and the process would continue until ‘the highest positive response is recorded’ (Randall et al., 1974). Davis was the one who first used the bidding game approach for estimating the benefits from goose hunting in 1963. This approach has been later on used by many authors for estimating the value of public goods (e.g. Randall et al., 1974; Brookshire et al., 1982). Moreover, this is the approach which has been widely used in a relatively large number of CV studies conducted in developing countries (e.g.

Whittington et al., 1990, 1992).

Using the bidding game approach for estimating the benefits from the abatement of aesthetic environmental damage associated with power plant and coal mine,

Randall et al. (1974) conclude that the bidding game was successful in meeting the valuation objective. However, the authors suggest that considerable amount of care should be taken in designing the bidding game so as to obtain reliable results. The results of many of the developing country CV studies on water supply (Whittington et al., 1991, 1992; Briscoe et al., 1990) that utilized bidding game approach suggest that this approach works well in developing countries. One of the advantages of this approach is that it provides relatively better results since it gives a ‘market-like’

situation to the respondents in which they could research their preferences (Cummings et al., 1986). Another advantage of this approach is that the researcher could obtain maximum willingness to pay value (Cummings et al., 1986). However, Cummings et al. (1986) argue that the cost of implementing the bidding game is comparatively higher in the sense that it involves presence of interviewers during the interview, etc. Another problem with bidding game is that the starting points used in the bidding game might influence the final value of the stated WTP. Apart from these problems, Loomis (1990) argues that the bidding is impracticable in mail surveys.

The second oldest technique is payment card approach, introduced by Mitchell and Carson (1984). The payment card would contain a range of WTP values for the public good under question from which the individuals have to choose their maximum WTP value. The respondents are facilitated with another benchmark version of the payment card that contains the average WTP amount paid by households for other public goods. Even though the payment card approach has some advantages such as its ability to elicit the maximum willingness to pay value, the problem with the payment card is that there is a chance that the WTP values would be possibly affected by range bias and centering bias (Mitchell and Carson, 1989). Moreover, the payment card approach may have limited use especially in rural areas of developing countries where the people have very limited experience with using payment cards.

The open-ended elicitation technique involves asking the maximum amount that the individuals are willing to pay for a public good or policy. The open-ended approach is convenient to answer, does not require an interviewer and does not result in any starting point bias (Walsh et al., 1984). For those studies which aim at deriving a value that would provide a conservative estimate, the open-ended approach would be efficient in the sense that this approach would provide a lower level conservative value than the bidding game approach (Walsh et al., 1984). However, this approach is prone to criticisms. Desvousges et al. (1993) point out that the open-ended approach tends to create large number of nonresponses or protest bids since respondents either find it difficult to answer or do not have incentive to provide true answer (Carson et al., 1996). Hanemann (1994) argues that the open-ended questions may attract

strategic bias and people may tell the cost rather than true value.

Due to problems with the techniques mentioned above, Bishop and Heberlein (1979) introduced take-it-or-leave-it approach (or single-bounded dichotomous choice approach). It involves assigning a single bid from a range of predetermined bids that potentially reflect the maximum willingness to pay amounts of the respondents for a particular good. The respondents are asked to state only ‘yes’ or ‘no’ to that bid on all or nothing basis (Mitchell and Carson, 1989). The major advantage of the single-bounded dichotomous choice approach is that it facilitates the respondents to complete the valuation process. Moreover, the strategic bias in the WTP values may be minimised since this approach is an incentive compatible one (Carson et al., 1996;

Hanemann, 1994). Despite its advantages, the single-bounded dichotomous choice approach has some disadvantages as well. One of the disadvantages is that one can derive only the maximum willingness to pay/minimum willingness to accept value from this approach but not the actual willingness to pay amount (Boyle et al., 1996).

This approach also attracts starting point bias (Ready et al., 1996). On the property of incentive compatibility, this approach may not work in two circumstances: when the public good is provided through voluntary contribution and when a new private or public good is provided (Carson et al., 1996). Moreover, this approach is less applicable in areas where the households have already decided about their willingness to pay value (Venkatachalam, 2004). Another problem is that it requires a large number of observations for identifying the distribution of values (Alberini, 1995;

Cameron and Quiggin, 1994).

A modified version of the take-it-or-leave-it approach has been introduced by Hanemann (1984, 1985) and Carson (1985) which is called, ‘double-bounded dichotomous choice (DB-DC) approach’ (or ‘take-it-or-leave-it-with follow up’). This involves assigning one more bid to the initial bid (in the single-bounded approach), whose direction depends on the ‘yes’ or ‘no’ answer to the initial bid. This approach has been first applied by Carson and Steinberg (1990) and Hanemann et al. (1991).

The major advantage of this approach is that one could identify the location of the maximum willingness to pay value from the data derived from this approach. This

The major advantage of this approach is that one could identify the location of the maximum willingness to pay value from the data derived from this approach. This