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 contamination. While these resources do give people utility, certain aspects of them do not have a market price as they are not directly sold – for example, people receive benefit from a beautiful view of a mountain, but it would be tough to value using price-based models. Contingent valuation surveys are one technique which is used to measure these aspects. Contingent valuation is often referred to as a ''stated preference'' model, in contrast to a price-based revealed preference model. Both models are utility-based. Typically the survey asks how much money people would be willing to pay (or willing to accept) to maintain the existence of (or be compensated for the loss of) an environmental feature, such as biodiversity. Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination. While these resources do give people utility, certain aspects of them do not have a market price as they are not directly sold – for example, people receive benefit from a beautiful view of a mountain, but it would be tough to value using price-based models. Contingent valuation surveys are one technique which is used to measure these aspects. Contingent valuation is often referred to as a ''stated preference'' model, in contrast to a price-based revealed preference model. Both models are utility-based. Typically the survey asks how much money people would be willing to pay (or willing to accept) to maintain the existence of (or be compensated for the loss of) an environmental feature, such as biodiversity. Contingent valuation surveys were first proposed in theory by S.V. Ciriacy-Wantrup (1947) as a method for eliciting market valuation of a non-market good. The first practical application of the technique was in 1963 when Davis used surveys to estimate the value hunters and tourists placed on a particular wilderness area. He compared the survey results to an estimation of value based on travel costs and found good correlation with his results. The method rose to high prominence in the USA in the 1980s when government agencies were given the power to sue for damage to environmental resources which they were trustees over. Following Ohio v Department of the Interior, the types of damages which they were able to recover included non-use or existence values. Existence values are unable to be assessed through market pricing mechanisms, so contingent valuation surveys were suggested to assess them. During this time, the EPA convened an important conference with an aim to recommend guidelines for survey design. The Exxon Valdez oil spill in Prince William Sound was the first case where contingent valuation surveys were used in a quantitative assessment of damages. Use of the technique has spread from there. Many economists question the use of stated preference to determine willingness to pay for a good, preferring to rely on people's revealed preferences in binding market transactions. Early contingent valuation surveys were often open-ended questions of the form 'how much compensation would you demand for the destruction of X area' or 'how much would you pay to preserve X'. Such surveys potentially suffer from a number of shortcomings; strategic behaviour, protest answers, response bias and respondents ignoring income constraints. Early surveys used in environmental valuation seemed to indicate people were expressing a general preference for environmental spending in their answers, described as the embedding effect by detractors of the method. In response to criticisms of contingent valuation surveys, a panel of high profile economists (chaired by Nobel Prize laureates Kenneth Arrow and Robert Solow) was convened under the auspices of the National Oceanic and Atmospheric Administration (NOAA) in 1993. The panel heard evidence from 22 expert economists and published its results in 1995. The recommendations of the NOAA panel were that contingent valuation surveys should be carefully designed and controlled due to the inherent difficulties in eliciting accurate economic values through survey methods.