ERE8: ValuationValuation theory
Total economic value
Indirect valuation methods
Hedonic pricing
Travel cost method
Direct valuation methods
Steps
Define a set of zones surrounding the site
Collect number of visitors from each zone in a certain period
Calculate visitation rates per population
Calculate round-trip distance and travel time
Estimate visitors per period and derive demand function
0 8000 0 52.0 3 744 Total 31.0 20.5 10.0 Costs 240 4000 60 2 282 2000 141 1 222 1000 222 0 Visits Population Visits/1000 Zone So now we have two points on our demand curve.
Drawbacks
Not data intensive, but a number of shortcomings
Assumes that all residents in a zone are the same
Individual data might be used instead
More expensive
Sample selection bias, only visitors are included
Other problems
Assumption that people respond to changes in travel costs the same way they would respond to changes in admission price
Opportunity cost of time
Single purpose trip
Substitute sites
Unable to look at most interesting policy questions: changes in quality
Use random utility models instead
Constructed Markets
Revealed preference methods can only estimate the use value of the environment, and only if that value affects behaviour in a measurable and interpretable manner
For the rest, we have to use either hypothetical markets or experimental markets (together: constructed)
Experimental markets have delivered little estimates (but a lot of insights), so the contingent valuation method remains – this is a stated preference method
Contingent Valuation (2)
Interview people, ask them for their willingness to pay for certain environmental goods and services
Advantage: Applicable to more than direct use value
Disadvantages: Hypothetical, people are unfamiliar with the situation, all sorts of biases may occur, interview design is always hard
History
First applications in early 1960s to value outdoor recreation
1979 the Water Resource Council recommended CV as one of 3 methods to determine project benefits
In the mid 1970s the EPA funded a research program to determine the promise and problems of the method
The Reagan Executive Order 12291 (1981)
All federal regulations on environmental policy should be submitted to a Cost-Benefit Analysis
1989 governmental decision on legitimacy of non-use values for TEV and equal standing
1989 Exxon Valdez oil spill
value loss of non-use values for US citizens
Design a CV study
Define a market scenario
Choose elicitation method
Design market administration
Design sampling
Design of experiment
Estimate WTP-function
Potential Biases
Incentive
Strategic
Compliance
Implied value
Starting point
Range
Relational
Importance
Position Misspecification
Theoretical
Amenity
Context
Embedding and warm glow
Incentive Biases
The interviewee deliberately gives a false answer
Strategic bias: Influence the outcome
Compliance/sponsor bias: Comply with presumed expectations
Compliance/interview bias: Try to please/impress the interviewer
Protest votes: Interviewees may object to valuation per se, or to being interviewed
Implied Value Biases
Starting point bias, in the bidding game
Range bias, in the payment card
Relational bias, if examples of other contributions are mentioned
Importance bias: The fact that the interviewer bothers to ask ...
Position bias, if multiple goods are valued
Misspecification Biases -Context
Misspecification of the market scenario
payment vehicle
property right: WTP/WTA
method of provision: like payment vehicle
budget constraint: ability to pay
elicitation: maximum WTP?
instrument: survey may confuse interviewees
question order
Other Misspecification Biases
Theoretical
Amenity/symbolic: The perceived good is different than intended
Amenity/part-whole: The interviewee thinks the good is wider or narrower than intended (geographical, issue, policy)
Amenity/metric: Different measurement
Amenity/probability: Different assessments of the chance of delivery
Embedding
WTP for same good varies depending on whether it is assessed on its own or embedded as part of a more inclusive package
Kahnemann (1986)
WTP to prevent drop in fish population in all Ontario lakes or small area respectively
Scope effect
Sub-additivity effect
Possible explanations
Substitution and satiation
Purchase of moral satisfaction (warm glow)
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