On visible choice set and scope sensitivity: - Dealing with the impact of study design on the scope sensitivity Improving the Practice of Benefit Transfer: a Preference Calibration Approach - Enhance the method of benefit transfer by including individual preference structures Topic

Agenda Part1: Introduction Part2 : On visible choice set and scope sensitivity: Part3 : Improving the Practice of Benefit Transfer: a Preference Calibration Approach Part4 : Conclusion and Discussion

Introduction: CVM is a valid method to evaluate non – marketed goods and service like changes in environmental resources… But only if it is conducted properly ! In the following we like to present two ways which improve CVM and help to derive better WTP estimates

INCLUSIVE LIST GOODS Additional to any goods presented previously in the list. EXCLUSIVE LIST GOODS is the kind of list that choice address goods are presented as alternative to other goods given in that list. DEFINITION

VISIBLE CHOICE SET Set of goods which given point in a valuation exercise that provide to respondent DEFINITION VISIBLE CHOICE SET : 2 approach 1. ADVANCE DISCLOSURE 2. STEPWISE DISCLOSURE

For example, respondents have been told that they would be asked to give estimate of: 1.Improved environmental service 2.Improved natural resource service 3.Natural area protection

SAMPLE II Initially present with just one of these asked to value then presented with 2 nd schemes and asked to value it and soon. ADVANCE DISCLOSURE SAMPLE I Full choice set of all 3 schemes prior to answer any valuation question.

ADVANCE DISCLOSURE

STEPWISE MANNER

SCOPE SENSITIVITY

Fundamentally incomplete of research come from neglecting a systematic examination design that relate to scope sensitivity. In many common study designs the choice set ( visible choice set ) present to respondents changes as they progress through a valuation exercise.

The matter of change in visible choice identifies the failure to completely inform to respondents about what is to come “before” they are asked to value the first improvement. Kahmenan and knetsch “ respondent should be informed in advance so they will have opportunity to allocate each contribution to an inclusive good among its separate valuation”

V.K Smith (1992) challenge to Kahmenan and Knetsch “minor procedure change would not alter the result.”

Relation between study design and scope sensitivity there is an impact from varying the visible choice set. Advance disclosure : field study revealed no significant difference between the mean/median WTP of and 3 improve scheme either ABU&ATD Stepwise found : mean of SBU > mean of STD SCOPE SENSITIVITY

Benefit Transfer Taking into about benefit show the study site and apply it to the policy site in WTP cause by Socio-economic characteristic of the population Physical characteristic of the site and policy site Proposed change in provision between the site of the good to be valued Differing market conditions

New approval Introduce an adaptation to the general applied benefit transfer by regarding that individual WTP for environment change is determined by the structure of their problem (Utility Function)

Generate estimated means consist with individual behavior ( regards individuals) Integration of multiple estimates Specify structure of preference Selecting functional form Cons & Pros

Compare simple approximate Will proper benefit measure

How you can improve? As quality improves the amount of C1 required to maintain utility at a constant level decreases. Hicksian or compensated demand for C1 decreases with increases in W Measure of benefit by deriving indirect utility function and expenditure function that correspond constrained utility maximization behaviour

Deductive strategy requires to parameterize how environmental resources enter consumer preferences or a utility function How information can be used to calibrate indirect utility functions so they can provide the basis for estimating a individual WTP for a quality change that is different from what was considered in the original source study

Calibrated benefit transfer I Value water quality improvements that are related to recreation which itself is attributed to those augmentations in water quality use sets of benefits to calibrate parameters of indirect utility functions Benefit: once computed all necessary parameters one can estimate WTP for alternative water quality changes ! 1st Example from recreation demand study :

Calibrated benefit transfer II 2 nd example from hedonic pricing model e.g. slope of hedonic price function offers point estimates of a composition of the parameters in the indirect utility function

C 1 reduce to maintain a constant utility level Quality improvement treat as equivalent of a reduce in the effect price

Valid BT requires the identification of individual preferences for the environmental resource of interest

Why ???!!! Each source of benefit estimated Each decide decomposition of this estimate link to common special of individuals preference changed in individual circumstance right after the economic valuation & of the resource changed and bias calibrate to individual well being

Method Use existing benefit estimate ( CS values marginal hedonic price, WTP) to calibrate constrained preference model Define the functional form of the (individual) utility function ( its relation to the resource + environmental quickly change of in interest Use information show existing study to estimates parameters of the utility function Form & Parameter of the function allow to specify a WTP function which can be used for difference changed in environmental quality

Step by Step (step2) α = slope of the good Q = mean of environment quality Changed in environment quality from Q 0 to Q 1 Benefit Transfer Function, but consist of with specification of preference

Further Steps Use more complex (realistic) specification for the preference structure Integrate benefit estimates from multiple sources into the calibration process

Benefit of study With the numerical characteristic of the preference function it is possible to consider : estimate observable quantity at the same time are measured With the calibration for one can estimate implicit expenditure share, price, and income elasticity a bid are more reliable than CS estimated for unobservable quality changes

Calibrated benefit transfer promotes above impress the method of BT and lead to better WTP estimates As a valid procedure, the need for primary should decreases Consider trade-off between saved costs for no conducts a pricing study are the cost for calibrating and deriving and utility function from data Conclusion

Hints for conducting estimating benefit measures: proper literature scan close look to previous published papers or surveys talk to experts avoid stepwise disclosure avoid simple benefit transfer and focus on the calibrated method  the time you save does not offset with invalid benefit estimates !!!

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