Environmental Economics II. Dr. Anil Markandya hssam @bath.ac.uk – 01225 386954 – Room 3E 4.31b. Valuing the Environment. Environmental Valuation Enable environmental impacts to be included in Cost-Benefit-Analysis (CBA)
An interview is used to create the hypothetical market within 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 realistic as possible.
The process of directly questioning a sample group to ascertain their valuation of a change 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.
CV study should begin with a basic theoretical model: two purposes:
Identifies the information required from questionnaire
Generates 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.
For a site-specific resource, the sample may be drawn from:
Visitors to the site (‘on-site’ sample)
• does not elicit information on the WTP of ‘non-users’; • interviews must be kept short; • procedure is needed to select among visitors to a site
Households within a certain radius of the site (‘off-site’ sample)
• geographical boundaries need to be defined; • a larger sample required, many households may not visit the site
It is also important to carefully select the size of the sample:
A larger means more confidence that the sample mean WTP/WTA is a reliable estimate of the ‘true’ mean WTP/WTA. (Balance precision and cost)
General background: Questions on general characteristics of the respondents – information 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
Respondent’s knowledge of the commodity in question, e.g. background questions concerning the respondent’s visits to a recreation site should cover such issues as:
• attitudes towards environmental issues; • proximity of their home 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-up the respondent’s confidence.
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 towards the institutional context.
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)
2b) If No to 1, “Are you willing to pay Z for public good A?” (Z<X)
Respondent simply asked to state maximum WTP for a specific environmental change
The advantages of 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.
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 question.
CVM: Stage 2 - Questionnaire Design - “Dichotomous Choice” or “Referendum” Elicitation Format
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 proposed change
Answer not the max WTP – only consent or refusal to pay a given amount
Random utility theory (logit model) are required to estimate the respondent’s 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.
Realistic – individuals typically make decisions faced with fixed prices.
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, your medical 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?
[If NO] Would you pay dollars to avoid being sick at all?
[If YES] Would you pay dollars to avoid being sick at all?
CVM: Stage 2 - Questionnaire Design - “Iterative Bidding” Elicitation Format
“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?”
- Use and Non-Use values investigation => did you vote yes, because (a) you will visit the national park, (b) even if you will never visit the national park, you want future generations to visit the park, etc.
=> Important for sampling plan
If Data are not as
Shown, use Non-
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:
familiarity – does the respondent understand the payment vehicle?
credibility – does the payment vehicle represent a realistic situation?
empathy – is the respondent favourably or unfavourably disposed towards the recipient of the funds?
feasibility – is the recipient of the funds capable of delivering the improvement?
universality – would all the respondents be affected by the payment vehicle?
where V denotes the indirect utility function, y is income, p is a vector of prices faced by the individual, and q0 and q1 are the alternative levels of the good or quality indexes (with q1>q0, indicating that q1 refers to improved environmental quality). Z is a vector of individual characteristics.
4) WTPi=1 iff WTPi*>B and WTPi=0 iff WTPi*≤B
β=-1/σ, the probability of a yes response can be rewritten as:
Equation (6) is the contribution to the likelihood by a “yes” observation (or a one) in a probit model with the intercept and one regressor—the bid. As long as is identified and estimable—which requires that the bid amount be varied to the respondents in the survey, so that it becomes a legitimate regressor in the probit model—mean/median WTP is estimated as:
where , and , with () the standard normal probability density function (pdf).
Next, compute the matrix G :
10) G =
The log likelihood function becomes:
where WTPH and WTPL are the lower and upper bound of the interval around WTP defined above, F() is the cdf of WTP, and θ denotes the vector of parameters that index the distribution of WTP. (Notice that for respondents who give two “yes” responses, the upper bound of WTP may be infinity, or the respondent’s 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.))
fj+1*=Fj+1*-FJ* for each offered price. These represent consistent estimates of the probability that WTP falls between price j and price j+1.