The embedding effect is an issue in

environmental economics Environmental economics is a sub-field of economics concerned with environmental issues. It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or ...

and other branches of

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...

where researchers wish to identify the value of a specific

public good Public good may refer to: * Public good (economics), an economic good that is both non-excludable and non-rivalrous * The common good, outcomes that are beneficial for all or most members of a community See also * Digital public goods Digital pu ...

using a

contingent valuation Contingent valuation is a survey-based economic technique for the valuation of non- market resources, such as environmental preservation or the impact of externalities like pollution. While these resources do give people utility, certain aspects ...

or willingness-to-pay (WTP) approach. The problem arises because public goods belong to society as a whole, and are generally not traded in the market. Because market prices cannot be used to value them, researchers ask a sample of people how much they are willing to pay for the public good, wildlife preservation for example. The results can be misleading because of the difficulty, for individual society members, of identifying the ''particular'' value that they attach to one ''particular'' thing which is embedded in a collection of similar things (e.g. The Tower of London within the set of all globally important historic monuments or Caernarvon Castle within the set of all Welsh Scheduled Monuments). A similar problem occurs with a wider selection of public goods (for example whether spending on preserving a specific wetland is more important than preserving a specific persons life for the next two years using taxpayers' money). The embedding effect suggests the

method is not an unbiased approach to measuring policy impacts for cost-benefit analysis of environmental, and other government

policies Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an orga ...

Policy implications

Few government policies are independent of any other governmental policy. Most policies involve either substitute or complementary relationships with others at either the same or different intergovernmental level. For example, the protection of coastal water quality is a goal of both state and multiple federal agencies. The

Clean Water Act The Clean Water Act (CWA) is the primary federal law in the United States governing water pollution. Its objective is to restore and maintain the chemical, physical, and biological integrity of the nation's waters; recognizing the responsibiliti ...

, wetlands protection programs, and

fisheries management plan Fishery can mean either the enterprise of raising or harvesting fish and other aquatic life; or more commonly, the site where such enterprise takes place (a.k.a. fishing ground). Commercial fisheries include wild fisheries and fish farms, ...

s all address coastal water quality. These policies may be substitutes or complements for each other. These relationships complicate the application of the

method. The resulting problems that may be encountered have been called the part-whole bias and sequencing and nesting (see below). One method of overcoming some aspects of this problem is to ask two questions (1) How much would you be willing to contribute to a specific tax fund for the whole set of items to be preserved? (e.g. all Coral Sea areas west of Australia) followed by (2) How much of this would you like to give to the preservation of the specific named item? (e.g. the Great Barrier Reef). These questions may also be supplemented by questions which ask about the respective importance of alternatives e.g. whether the preservation of the Great Barrier Reef is more/the same/less important than other public goods such as poor relief, health care, education etc.

Part-Whole Bias

If the contingent valuation method is used to elicit

willingness to pay In behavioral economics, willingness to pay (WTP) is the maximum price at or below which a consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, famil ...

for two government policies independently (the parts) the sum of the independently estimated willingness to pay amounts may be different from the willingness to pay elicited for both projects (the whole). This result is troubling if the projects are geographically related, for example, different

wilderness area Wilderness or wildlands (usually in the plural), are natural environments on Earth that have not been significantly modified by human activity or any nonurbanized land not under extensive agricultural cultivation. The term has traditionally re ...

s (McFadden, 1994). This result does not violate the nonsatiation axiom of

consumer theory The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pre ...

if projects are perfect substitutes (Carson and Mitchell, 1995). Several applications of the contingent valuation method have found an absence of part-whole bias (e.g., Whitehead, Haab, and Huang, 1998).

Sequencing and Nesting

A related issue occurs with the sequential valuation of projects. Consider a two-part policy valued in two different sequences. The willingness to pay for a project when valued first will be larger than when the question is placed second. Independent valuation, in effect valuing each project at the beginning of a sequence, will always lead to the largest of the possible willingness to pay estimates. This result is expected for the value of public goods estimated with the contingent valuation method due to substitution and income effects (Hoehn and Randall, 1989; Carson, Flores, and Hanemann, 1998).

References

*Carson, Richard T., and Robert Cameron Mitchell, “Sequencing and Nesting in Contingent Valuation Surveys,” ''Journal of Environmental Economics and Management'', 28, 155-173, 1995. *Hoehn, John P., and Alan Randall, “Too Many Proposals Pass the Benefit Cost Test,” ''American Economic Review'', 79, 541-551, 1989. *Carson, Richard T., Nicholas E. Flores, and W. Michael Hanemann, “Sequencing and Valuing Public Goods,” ''Journal of Environmental Economics and Management'', 36, 314-324, 1998. *McFadden, Daniel, “Contingent Valuation and Social Choice,” ''American Journal of Agricultural Economics'', 76, 689-708, 1994. *Whitehead, John C., Timothy C. Haab, and Ju-Chin Huang, “Part-Whole Bias in Contingent Valuation: Will Scope Effects Be Detected with Inexpensive Survey Methods?” ''Southern Economic Journal'', 65, 160-168, 1998. Environmental economics