Valuation 6: CVM continued Valuation of non-use values The Exxon Valdez oil spill An application to waterfowl Embedding and possible causes Warm-glow and its effect on donations to public goods The NOAA guidelines The EU environmental liability directive

Last week we looked at Direct and indirect valuation methods Total economic value revised The contingent valuation method, and its many potential biases Among them the part- whole/embedding problem - suggesting that people do not answer what it is being asked

WTP for conservation of the Apollo (Parnassius apollo) Found on mountains in Europe usually above 1000m up to 2000m On the IUCN Red List of threatened species Due to changes/degradation of their habitat with less food available for the caterpillars

WTP for the Apollo (2) Suppose a fund is set up to pay for a perpetual conservation of this species Every hectare of protected land has a probability of 30% that the species will survive there over the next 50 years A hectare of protected land costs EUR 1000 to purchase and EUR 50 per year to manage the conservation What are you willing to pay per year to donate to the fund?

WTP for conservation What about all the other endangered species including mammals, birds, insects etc.? The 2004 IUCN Red List contains 15,589 species threatened with extinction Focusing on a number of „flagship“ species might translate into funding for their natural habitat and provide much broader conservation benefits –E.g. giant panda, elephant, lion, tiger Otherwise, society might be willing to support a „flagship“ species alone

Ex-ante and ex-post measurements of non-use values The ex-ante use of preference based values for the determination of benefits is valuable for policy makers Is it equally valuable to use this method ex-post for the measurement of damages?

The Exxon Valdez oil spill The oil tanker departed the Valdez oil terminal, Alaska on March 23, 1989 with 53 mio. gallons of crude oil The ship manoeuvred out of the shipping lane to avoid icebergs but failed to return to the lanes and struck a reef The accident resulted in a discharge of about 11 mio. gallons of oil into Prince William Sound

Exxon Valdez oil spill (2) Environmental Impact –Thousands of animals died –Due to thorough cleanup little visual evidence but reductions in some animal populations can still be observed Litigation –The damage was estimated to lie between US$3 and $15 billion –Exxon settled for US$ 1 billion in natural resource damages and restitution for injuries –In addition, Exxon spent over US$ 2 billion on oil spill response and restoration

Waterfowl - Survey Study: Bill Desvouges and colleagues, 1993 Context: Exxon Valdez oil spill Funding: Exxon Corp. Mall survey, developed using focus groups, one-on-one pretests, and two mall pretests Two shopping malls in Atlanta, Georgia, outside the Central Flyway minutes 1205 completed questionnaires

Waterfowl – Survey -2 Q1 How often in the past 6 months have you heard about issues involving migratory waterfowl (select number: 1 (none) … 5(seven or more times)) Q2 Is protecting waterfowl important to you (if yes select reasons) Show way of Central Flyway; second highest number of migratory waterfowl, 8.5 million a year Q3 How would you rate your knowledge (low, mid, high) of threats to the waterfowl in the central flyway (oil spills, waste oil holding ponds, wetlands destruction, herbicides and pesticides)

Waterfowl – Survey -3 Describe waste-oil holding ponds In 1989, N ducks died there. This is x% of the 8.5 million migratory waterfowl Ponds could be covered by nets, Federal Government considers this, Fish and Wildlife Service would monitor and enforce Q4 Think about your income, expenses, alternatives. What is the most that your household would agree to pay each year in higher prices for wire-net covers to prevent about N migratory waterfowl from dying each year in waste-oil holding ponds in the Central Flyway?

Waterfowl – Survey -4 Q5 Is the amount greater than zero. If yes, select most important reason Q6 If no, select most important reason Q7 Indicate agreement to statements Q8 Ditto for waterfowl Q9 Activities Q10 Age; Q11 Education; Q12 Sex; Q13 Race; Q14 Income; Q15 Household size; Q16 Membership

Waterfowl – Results 398 answered for N=2,000; 408 for N=20,000; 399 for N=200,000 Excluded 29%: as outliers (3%), protest bids (8%), unlikely (1%) and rubbish (17%) WTP (2,000) = $59  16 /household/year WTP (20,000) = $59  10 /household/year WTP (200,000) = $71  15 /household/year Not significantly different!

Waterfowl – Reasons Desvousges et al. „we find that CV yields estimates that fail to meet several basic criteria for accuracy“ Diamond and Hausman „responses to CV questions are not consistent with the basic economic theory of choice“ –“Is some number better than no number?” People cannot count People do not listen People realised that 2,000 or 200,000 ducks is small compared to 8.5 million Embedding and warm glow

Embedding WTP for same good varies depending on whether it is assessed on its one or embedded as part of a more inclusive package Kahnemann (1986) –increased taxes to prevent drop in fish population in all Ontario lakes/smaller area scope effect sub-additivity effect Possible explanations –Substitution and satiation –Purchase of moral satisfaction

Some Puzzles In a large economy, no one should contribute to public goods like the Red Cross, the Salvation Army, Greenpeace – yet they do Government support should crowd out charitable donations – but it does not This suggests that people donate to public goods for other reasons than pure altruism – social pressure, guilt, sympathy or warm glow may explain this

Warm Glow Consider For a given wealth w i the agent derives utility from private consumption x i, from donating g i and from the public good G Notice that g i enters the function twice Three cases Purely altruistic: Purely egoistic: Impurely altruistic:

Warm Glow (2) can be rewritten as The maximisation problem is then equivalent to Differentiating with respect to G and solving yields

Warm Glow (3) The donations function The marginal propensity to donate is The marginal propensity to donate for altruistic reasons is The marginal propensity to donate for egoistic reasons is

Warm Glow (4) The marginal propensity to donate is What is the sign of f ie ? If we cut G -i by $1 and increase w i by $1 the first argument of f i () remains unchanged As w i =x i +g i the actor would spend some money on x i and some on G so that G would fall If we cut w i by a tax of $1 and increase G -i by $1 G would increase Warm glow leads to higher donations Warm glow leads to embedding

NOAA guidelines from 1993 A panel of experts provided advice to the National Oceanic and Atmospheric Administration on the question –“ is the CVM capable of providing estimates of lost non-use or existence values that are reliable enough to be used in the natural damage assessment?” Conclusion: Yes, if… The six most important guideline: CV experiments should –rely on face-to-face interviews –elicit the respondent’s WTP rather than WTA –use dichotomous choice referendum elicitation format –contain an accurate and understandable description of the programme or policy –include reminders of the substitutes for the commodity in question –include a follow-up section at the end to be sure the if the respondent understood the choice

Environmental Liability in the EU There is very limited provision for assessment of environmental damage Most legislation in member states uses “traditional” legal forms rather than environmental damages per se –Personal injury or property damage The EU Environmental Liability Directive fills this legislative gap and broadens the notion of damages to cover direct or indirect damage to the aquatic environment, to species and natural habitat or contamination of the land –Deadline for transposition in the Member States was

The EU Environmental Liability Directive In addition to primary remedial measures: The use of resource-to-resource or service-to- service equivalence approaches shall be considered first –Provide natural resources and/or services of the same type, quality and quantity –Where this is not possible, alternative resource and/or services shall be provided (reduction in quality can be offset by increase in quantity) If this is not possible, alternative valuation techniques shall be used –The authority prescribes the method

Implications Applied at reasonable cost? Who should be counted as part of the affected population? –Summing over population can produce enormous estimates Sufficiently accurate for use in court? –Small errors can make significant differences  Contingent valuation studies are easy to do, but hard to do really well