Stated Preference & Experimental Markets Methods for measuring non-market benefits

Recall revealed preference Remember, we would like to use “revealed preference” approaches to value environmental assets. What if value (or part of value) can’t be captured within an existing market? Can use the “Contingent Valuation Method” (CVM)…Measures value contingent on existence of a market.

Some examples The value of the Channel Islands marine reserve? Do people value the organisms or the reserve? The damages from Exxon Valdez spill? The value of restoring steelhead to Ventura River? The damage from drilling in ANWR?

Existence values Notice, most of these are Non-use values and Existence values We would like to know the demand curve for the environmental good. Recall demand measures “willingness to pay” for different levels of the good.

How elicit “willingness to pay”? No market exists within which to measure value Use survey Many challenges to do a credible job Need to design survey to minimize opportunities for bias of results.

Cookbook procedure [1 of 2] 1.Define the “market scenario” or payment vehicle Or might be open ended (“how much are you willing to pay for XXX”) 2.Determine elicitation method Direct question, discrete choice, bidding game, payment card, etc… 3.Design elicitation scheme Mail, telephone, , in person

Cookbook procedure [2 of 2] 4.Determine sample design Population, randomization of respondents, randomization of questions, etc. 5.Determine experimental design How obtain demand curve and conduct further analysis to answer question 6.Estimate demand function Conduct analysis to answer question

Problems with CVM WTA or WTP?…get different answers. Hypothetical bias Continually remind of budget constraint Information about thing being valued “Warm Glow” Open-ended is unfamiliar market context Embedding problem

NOAA guidelines for CVM Minimize non-response Personal interviews Pretest for interviewer effects etc. WTP not WTA Referendum format Provide adequate background info. Remind of substitute commodities Include & explain non-response option (not $0)

Types of payment vehicle Payment affects all parties National tax, local tax, fee or charge for use, price increase for use. Note: respondent may disagree with agency responsible for managing resource. Voluntary payment Donation to trust fund Note: remember free-riding problem, also may get strategic bias.

Open-ended elicitation “What is the maximum amount you would be prepared to pay every year [vehicle] to XXX?” For: Straightforward, no implied value cues/anchoring bias, gives max WTP Against: Large non-response/protest, unrealistically large bids, unreliable, unlike normal market transaction

Bidding game elicitation “Would you pay $XXX every year [vehicle] to YYY?” [keep increasing bid until answer is “No” or decrease until “Yes”] For: Forces respondent to consider preferences. Against: Anchor bias, yea-saying, cannot be used in mail surveys.

Payment card elicitation “Which of the amounts listed below describeds your maximum WTP every year [vehicle] to improve XXX?” [list of $ values] For: Avoids starting point bias, values can be actual tax or household benchmarks Against: Range of numbers can induce bias, cannot be used on telephone.

Single-bounded dichotomous choice elicitation (referendum) “Would you pay $X per year [vehicle] to improve YYY?” [randomly vary X] For Simplifies choice (similar to market), minimizes non-response, straightforward Against: May get inflated values, some yea-saying, less informative, starting point bias.

Double-bounded dichotomous choice elicitation “Would you pay $X every year [vehicle] to improve YYY?” [If yes: “And would you pay Z (>X)?”, If no: “And would you pay W (<X)?”. For: More efficient than referendum (because know bounds. Against Same as referendum

Major sources of error in CVM 1.Scenario misspecification 1. Divergence between what respondent is answering and what researcher is asking 2.Implied value cues 1. Unfamiliar choice problem, respondent wants to give “right” answer. 3.Strategic bias 1. Low bid (think taxes will  but good won’t) 2. High bid (think won’t have to pay for it)

Reliability of CVM estimates Compare results with comparable revealed preference results Construct market & compare results Use CVM to measure demand for market good Test method (same sample over time) Surveys of purchase intentions and actual purchases (market research)

Example 1: ecotourism in Kenya Ecotourism captures some of WTP for preserving wildlife Lake Nakuru Nat’l Park in Kenya (360 species of birds) Farming has reduced water quality and subsequent wildlife pops. CVM estimates value park (value to users only) at $7.5 million.

Example 2: Economic value of noncommercial fish (US) Rivers in 4-corners region 2465 miles of river habitat for 9 endangered fish. Protection requires fish bypasses, passageways, habitat improvements. What is the economic value of preserving the habitat?

The application (4 corners fish) Respondents given Maps of critical habitat Told that officials though habitat protection too costly, were going to eliminate critical habitat designation Asked if they would contribute to “Four Corners Endangered Fish Trust Fund” Also told all taxpayers would contribute

Voting for 4 corners fish If majority votes in favor of contribution to fund: Rivers managed for optimum fish protection. Fish will be saved & removed from ESA over next 20 years. If majority votes against Rivers managed for maximum hydroelectic output. 4 of 9 would likely become extinct.

Actual survey instrument “Suppose a proposal to establish a Four Corners Region Threatened and Endangered Fish Trust Fund was on the ballot in the next nationwide election. How would you vote on this proposal? Remember, by law, the funds could only be used to improve habitat for fish. If the Four Corners Region Threatened and Endangered Fish Trust Fund was the only issue on the next ballot and it would cost your household $______ every year, would you vote in favor of it? Circle Yes or No.” Dollar value randomly chosen from $1 - $350.

Results of 4 corner fish Survey sent to random sample of corner households. Additional 800 to households in rest of US. Average WTP = $195. Extrapolated to rest of population. Benefits far exceeded costs.

Example 3: Value of Waterfalls FERC faced relicensing. How much water should be required to fall at recreation area? More water, less power generated. Previous license required 50 cfs (trickle) Survey elicited WTP for increased overflow of water.

Survey & results: waterfalls Pictures with different flow levels mailed to random sample of past visitors to site. How much pay to visit park in each case. How many times visit park? Result: Summer months optimal flow should be 500 cfs (not 50 cfs).

Experimental markets Main criticism of CVM is that it is hypothetical. Develop an experimental market, with actual participants to elicit values. Researcher constructs market, including the good(s) and money Observe behavior of subjects (may be field or laboratory)

Example: goose hunting “Good”: access to goose hunting reserve. Permits in short supply. Experimental market: send hunter (with permit) check for $1 - $200, return one. Mean of field experiment mkt. Was $63 for a license. Estimate of value of the good is $63.