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Contingent valuation is a
survey Survey may refer to: Statistics and human research * Statistical survey, a method for collecting quantitative information about items in a population * Survey (human research), including opinion polls Spatial measurement * Surveying, the techniq ...
-based economic technique for the valuation of non- market resources, such as
environmental preservation Environmentalism or environmental rights is a broad philosophy, ideology, and social movement regarding concerns for environmental protection and improvement of the health of the environment, particularly as the measure for this health se ...
or the impact of
externalities In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
like
pollution Pollution is the introduction of contaminants into the natural environment that cause adverse change. Pollution can take the form of any substance (solid, liquid, or gas) or energy (such as radioactivity, heat, sound, or light). Pollutants, the ...
. While these resources do give people
utility As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
, certain aspects of them do not have a
market price A price is the (usually not negative) quantity of payment or Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
as they are not directly sold – for example, people receive benefit from a beautiful view of a mountain, but it would be tough to value using
price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
-based models. Contingent valuation surveys are one technique which is used to measure these aspects. Contingent valuation is often referred to as a ''stated preference'' model, in contrast to a price-based ''
revealed preference Revealed preference theory, pioneered by economist Paul Anthony Samuelson in 1938, is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies on consumer behavior. Revealed preference models assume t ...
'' model. Both models are utility-based. Typically the survey asks how much money people would be willing to pay (or willing to accept) to maintain the existence of (or be compensated for the loss of) an environmental feature, such as
biodiversity Biodiversity or biological diversity is the variety and variability of life on Earth. Biodiversity is a measure of variation at the genetic (''genetic variability''), species (''species diversity''), and ecosystem (''ecosystem diversity'') l ...
.


History

Contingent valuation surveys were first proposed in theory by S.V. Ciriacy-Wantrup (1947) as a method for eliciting market valuation of a non-market
good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...
. The first practical application of the technique was in 1963 when Robert K. Davis used surveys to estimate the value hunters and tourists placed on a particular wilderness area. He compared the survey results to an estimation of value based on travel costs and found good correlation with his results. This work was published as his Ph.D. Dissertation at Harvard "The Value of Outdoor Recreation: An Economic Study of the Maine Woods." See also: This work, and other early applications of the method are described in Chapter 1 of "Using Surveys to Value Public Goods" by Robert Cameron Mitchell, and Richard T. Carson The method rose to high prominence in the USA in the 1980s when government agencies were given the power to sue for damage to environmental resources which they were trustees over. Following ''Ohio v Department of the Interior'', the types of damages which they were able to recover included non-use or
existence value Existence values are a class of economic value, reflecting the benefit people receive from knowing that a particular environmental resource, such as Antarctica, the Grand Canyon, endangered species, or any other organism or thing exists. Existenc ...
s. Existence values are unable to be assessed through market pricing mechanisms, so contingent valuation surveys were suggested to assess them. During this time, the EPA convened an important conference with an aim to recommend guidelines for survey design. The
Exxon Valdez oil spill The ''Exxon Valdez'' oil spill occurred in Prince William Sound, Alaska, on March 24, 1989. ''Exxon Valdez'', an oil supertanker owned by Exxon Shipping Company bound for Long Beach, California struck Prince William Sound's Bligh Reef, west o ...
in
Prince William Sound Prince William Sound (Sugpiaq: ''Suungaaciq'') is a sound of the Gulf of Alaska on the south coast of the U.S. state of Alaska. It is located on the east side of the Kenai Peninsula. Its largest port is Valdez, at the southern terminus of the Tr ...
was the first case where contingent valuation surveys were used in a quantitative assessment of damages. Use of the technique has spread from there.


Past controversies

Many economists question the use of stated preference to determine
willingness to pay In behavioral economics, willingness to pay (WTP) is the maximum price at or below which a consumer will definitely buy one unit of a product.Varian, Hal R. (1992), Microeconomic Analysis, Vol. 3. New York: W.W. Norton. This corresponds to the st ...
for a good, preferring to rely on people's
revealed preference Revealed preference theory, pioneered by economist Paul Anthony Samuelson in 1938, is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies on consumer behavior. Revealed preference models assume t ...
s in binding market transactions. Early contingent valuation surveys were often open-ended questions of the form "how much compensation would you demand for the destruction of X area" or "how much would you pay to preserve X". Such surveys potentially suffer from a number of shortcomings; strategic behaviour, protest answers,
response bias Response bias is a general term for a wide range of tendencies for participants to respond inaccurately or falsely to questions. These biases are prevalent in research involving participant self-report, such as structured interviews or surveys. R ...
and respondents ignoring income constraints. Early surveys used in environmental valuation seemed to indicate people were expressing a general preference for environmental spending in their answers, described as the
embedding effect The embedding effect is an issue in environmental economics and other branches of economics where researchers wish to identify the value of a specific public good using a contingent valuation or willingness-to-pay (WTP) approach. The problem arise ...
by detractors of the method. In response to criticisms of contingent valuation surveys, a panel of high profile economists (chaired by
Nobel Prize The Nobel Prizes ( ; sv, Nobelpriset ; no, Nobelprisen ) are five separate prizes that, according to Alfred Nobel's will of 1895, are awarded to "those who, during the preceding year, have conferred the greatest benefit to humankind." Alfr ...
laureates
Kenneth Arrow Kenneth Joseph Arrow (23 August 1921 – 21 February 2017) was an American economist, mathematician, writer, and political theorist. He was the joint winner of the Nobel Memorial Prize in Economic Sciences with John Hicks in 1972. In economics ...
and
Robert Solow Robert Merton Solow, GCIH (; born August 23, 1924) is an American economist whose work on the theory of economic growth culminated in the exogenous growth model named after him. He is currently Emeritus Institute Professor of Economics at the Ma ...
) was convened under the auspices of the United States
National Oceanic and Atmospheric Administration The National Oceanic and Atmospheric Administration (abbreviated as NOAA ) is an United States scientific and regulatory agency within the United States Department of Commerce that forecasts weather, monitors oceanic and atmospheric conditio ...
(NOAA). . . . The panel heard evidence from 22 expert economists and published its results in 1993. The recommendations of the NOAA panel were that contingent valuation surveys should be carefully designed and controlled due to the inherent difficulties in eliciting accurate economic values through survey methods. The most important recommendations of the NOAA panel were that: *Personal interviews be used to conduct the survey, as opposed to telephone or mall-stop methods. *Surveys be designed in a yes or no referendum format put to the respondent as a vote on a specific tax to protect a specified resource. *Respondents be given detailed information on the resource in question and on the protection measure they were voting on. This information should include threats to the resource (best and worst-case scenarios), scientific evaluation of its ecological importance and possible outcomes of protection measures. *Income effects be carefully explained to ensure respondents understood that they were to express their willingness to pay to protect the particular resource in question, not the environment generally. *Subsidiary questions be asked to ensure respondents understood the question posed. *" VMproduces estimates reliable enough to be the starting point of a judicial process of damage assessment, including passive-use values" and has been successfully used in such high profile cases as the
Exxon Valdez oil spill The ''Exxon Valdez'' oil spill occurred in Prince William Sound, Alaska, on March 24, 1989. ''Exxon Valdez'', an oil supertanker owned by Exxon Shipping Company bound for Long Beach, California struck Prince William Sound's Bligh Reef, west o ...
. The guiding principle behind these recommendations was that the survey operator has a high burden of proof to satisfy before the results can be seen as meaningful. Surveys meeting these criteria are very expensive to operate and to ameliorate the expense of conducting surveys the panel recommended a set of reference surveys which future surveys could be compared to and calibrated against. The NOAA panel also felt, in general, that conservative estimates of value were to be preferred and one important consequence of this decision is that they recommended contingent valuation surveys measure willingness to pay to protect the good rather than willingness to accept compensation for the loss of the resource. As a result, current contingent valuation methodology corrects for these shortcomings, and current empirical testing indicates that such bias and inconsistency has been successfully addressed.


Current status

As shown by Mundy and McLean (1998), contingent valuation is now widely accepted as a
real estate appraisal Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value for real property (usually market value). Real estate transactions often require appraisals because they occur infrequently and every pro ...
technique, particularly in contaminated property or other situations where revealed preference models (i.e. transaction pricing) fail due to disequilibrium in the market. McLean, Mundy, and Kilpatrick (1999) demonstrate the acceptability of contingent valuation in real estate expert testimony, and the current standards for use of contingent valuation in litigation situations is described by Diamond (2000). The technique has been widely used by government departments in the US when performing cost-benefit analysis of projects impacting, positively or negatively, on the environment. Examples include a valuation of water quality and recreational opportunities in the river downstream from Glen Canyon dam,
biodiversity Biodiversity or biological diversity is the variety and variability of life on Earth. Biodiversity is a measure of variation at the genetic (''genetic variability''), species (''species diversity''), and ecosystem (''ecosystem diversity'') l ...
restoration in the Mono Lake and restoration of
salmon Salmon () is the common name for several list of commercially important fish species, commercially important species of euryhaline ray-finned fish from the family (biology), family Salmonidae, which are native to tributary, tributaries of the ...
spawning grounds in certain rivers. The technique has also been used in Australia to value areas of the
Kakadu National Park Kakadu National Park is a protected area in the Northern Territory of Australia, southeast of Darwin. It is a World Heritage Site. Kakadu is also gazetted as a locality, covering the same area as the national park, with 313 people recorded liv ...
as well as trophy property in the United States, and is recognized as a valuable tool in the appraisal of
brownfields In urban planning, brownfield land is any previously developed land that is not currently in use. It may be potentially contaminated, but this is not required for the area to be considered brownfield. The term is also used to describe land prev ...
. Kilpatrick, John A., Valuation of Brownfields, Chapter 29 in
Lexis-Nexis LexisNexis is a part of the RELX corporation that sells data analytics products and various databases that are accessed through online portals, including portals for computer-assisted legal research (CALR), newspaper search, and consumer inform ...
Matthew Bender's ''Brownfield Law and Practice'', 2007


See also

*
Choice modelling Choice modelling attempts to model the decision process of an individual or segment via revealed preferences or stated preferences made in a particular context or contexts. Typically, it attempts to use discrete choices (A over B; B over A, B & C) ...
*
Opportunity cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
*
Scarcity In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
*
Trade-off A trade-off (or tradeoff) is a situational decision that involves diminishing or losing one quality, quantity, or property of a set or design in return for gains in other aspects. In simple terms, a tradeoff is where one thing increases, and anot ...


References

*W. Michael Hanemann, 'Valuing the Environment Through Contingent Valuation' ''The Journal of Economic Perspectives'', Vol. 8, No. 4. (Autumn, 1994), pp. 19–43 *Paul R. Portney, 'The Contingent Valuation Debate: Why Economists Should Care' ''The Journal of Economic Perspectives'', Vol. 8, No. 4. (Autumn, 1994), pp. 3–17


External links


NOAA reportEnvironmental Valuation and Cost-Benefit News
(Robert K. Niewijk)
Association of Environmental and Resource Economists
(AERE).
- JEEM: Journal of Environmental Economics and Management
(AERE's official "technical" journal).
- REEP: Review of Environmental Economics and Policy
(AERE's official "accessible" journal).

(University of Washington Office of Research)

at
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