Contingent valuation
Contingent valuation is a survey-based economic technique for the valuation of non-market resources, typically environmental areas.
History
Contingent valuation surveys were first proposed in theory by Ciriacy and 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 hunterns 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 1980s when government agencies were given the power to sue for damage to environmental resources which they were trustees over. The types of damages which they were able to recover included non-use or existence values. These non-use values are the benefits which people recieve from knowing that a particular environmental resource, such as Antartica or the Grand Canyon, exists in a relatively untouched state. Existence values are inherently unable to be assessed through market mechanisms so contingent valuation surveys were suggested to assess them and the EPA convened a conference with an aim to recommend guidelines for survey design. The Exxon Valdez oil spill in Port Arthur Sound was the first case where contingent valuation surveys were used in a quantitative assessment of damages when a court of appeal ruled that existence values were actionable. Use of the technuique has spread from there.
Controversies
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 answers, protest responses, 'warm glow' effects and respondents ignoring income constraints, to name a few (Diamond and Hausman, 1994). Some surveys results 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.
Current Status
In response to criticisms, 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 Adminstration (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 values through survey methods. The most important recommendations surveys be conducted in person, that surveys be in a yes or no referendum format in the format of a specific tax to protect a particular resource, that respondends were given detailed information on the resource in question and that income effects were pointed out. Surveys meeting these criterion are very expensive to operate but this expense was seen as necessary to produce meaningful results. The technique has been widely used by government departments in the US when doing cost-benefit anlysis of projects impacting on the environment, such as the Glen Canyon dam.
Further Reading
W. Michael Hanemann, 'Valuing the Environment Through Contingent Valuation' The Journal of Economic Perspectives, Vol. 8, No. 4. (Autumn, 1994), pp. 19-43
Peter A. Diamond; Jerry A. Hausman, 'Contingent Valuation: Is Some Number better than No Number?' The Journal of Economic Perspectives, Vol. 8, No. 4. (Autumn, 1994), pp. 45-64
Paul R. Portney, 'The Contingent Valuation Debate: Why Economists Should Care' The Journal of Economic Perspectives, Vol. 8, No. 4. (Autumn, 1994), pp. 3-17