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

2. Today’s Menu Constructed market approaches Designing a CVM survey
Conducting an experiment

3. Recall revealed preference
Remember, our first choice is always to use “revealed preference” approaches to value environmental assets.
What if value (or part of value) can’t be captured within an existing market?
Answer: use “constructed market” methods

4. What are constructed market methods?
Stated preference methods
More generally known as “Contingent Valuation Methods” (CVM)
Ask people: “How much is the environmental good worth to you?”
Experimental markets
Typical goal: learn how people think about environmental goods
Two types of experiments
Field
Laboratory

5. Some examples The value of the Channel Islands marine reserve?
Do people value the organisms or the reserve?
Should DDT plume off of Rancho Palos Verde be cleaned up with state funds?
How large are the wildlife damages from Exxon Valdez spill?
The value of restoring steelhead to Ventura River?
The environmental damage from drilling in ANWR?

6. 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.

7. Value of solar-generated electricity
Introduction
Explain purpose of survey and how long it will take, importance of truthful answers
Background attitudes
Solar as “green” electricity
Compare to “brown” electricity
Importance of air quality, current opinion about air quality
Have you participated in green markets?
Eliciting value of green electricity
Concept of Renewable Energy Credit (REC)
Would your purchase a REC for $X? (vary X)
Socioeconomic characteristics
Gender, Age, Race, Income, Greenness

8. Example – Seoul CVM Survey Instrument
Introduction – explain purpose of survey and time to complete (30 min)
Request background attitudes and info
What is your opinion about current tap water in Seoul? (very good, good, etc)
In the last five years have you or anyone in your household taken any of these steps to obtain cleaner water? (install water filter, etc)
Value of Water Quality Improvement
Explain major pollution accident in 1991 that contaminated drinking water of Seoul
If the government takes no action, how many times in the next five years do you think we will have a similar accident?
[Give one minute description of continuous monitoring system that will warm your household of contamination]
What is the most your household would pay in taxes for such monitoring?
Background information
Age, education, household size, income

9. Cookbook procedure [1 of 2]
Define the “market scenario” or payment vehicle
“How much are you willing to pay for …” vs.
“Bond issue has been proposed to pay for …”
Determine elicitation method
Direct question, discrete choice, bidding game, payment card, etc…
Design elicitation scheme
Mail, telephone, , web, in person

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

11. Problems with CVM WTA or WTP?…get different answers. Hypothetical bias
How real is the budget constraint?
Ambiguity about what is being valued
“Warm Glow”—purchase of moral satisfaction?
Open-ended is unfamiliar market context
Embedding problem
Value of one park? Value of suite of parks?
Existence value is a problematic concept since it is unobserved

12. 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)

13. 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.

14. 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

15. Bidding game elicitation
“Would you pay $X every year via [vehicle—tax, utility bill]?” [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.

16. Payment card elicitation
“Which of the amounts listed below describes your maximum WTP every year [using vehicle Y] to improve X?” [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.

17. Single-bounded dichotomous choice elicitation (referendum)
“Would you pay $X per year using [vehicle] to improve Y?” [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.

18. Double-bounded dichotomous choice elicitation
“Would you pay $X every year using [vehicle] to improve Y?” [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

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

20. 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)

21. 1. Green Power Demand
Objective: derive a demand curve for renewable energy credits in Davis, CA
Advise REC company on pricing and capacity
Bren GP, 2005
400 survey responses from Davis residents
Socioeconomic characteristics, political, knowledge of green power, etc.
Method: contingent valuation survey distributed in person to Davis residents
Regression of Yes/No on characteristics, price, etc

22. Regression results

23. Predicted demand

24. 2. Green building demand 2006 Bren GP
Demand for houses constructed of alternative green materials
Primarily compressed straw block
Key issues:
Reliability, energy savings, durability, earthquake, appearance, etc.
Method: contingent valuation survey by “Knowledge Networks” – responses from across US.
Regression of Yes/No on price, socioeconomics, location, rainfall, temp, etc.
Second survey to industry – asked to predict consumer demand…consistent with consumer responses?

25. Consumer vs. Industry

26. Spatial density of demand

27. 3. Goose Hunting in Wisconsin
Duck licenses limited in number and issued by lottery
Compare three techniques
Travel Cost
CVM
Experimental Methods
CVM WTP and WTA bracketed true value

28. 4: 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.

29. 5: Economic value of noncommercial fish (US)
Rivers in Four 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?

30. The application (Four 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

31. Voting for Four 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.

32. 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.

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

34. 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)