Valuation 6: CVM continued
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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 partwhole/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
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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
• 10-12 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
max Ui (xi , G , gi )
xi , gi ,G
s.t. xi  gi  wi ;G  i 1 gi
n
• For a given wealth wi the agent derives utility
from private consumption xi, from donating gi and
from the public good G
• Notice that gi enters the function twice
• Three cases
Purely altruistic:
Ui  Ui (xi , G )
Purely egoistic:
Ui  Ui (xi , gi )
Impurely altruistic: Ui  Ui (xi , G , gi )
Warm Glow (2)
G  i 1 gi
n
can be rewritten as
gi  Gi  G  gi  G  Gi
The maximisation problem is then equivalent to
maxUi (wi  Gi  G , G , G  Gi ) 
G
xi wi  gi
gi G Gi
Differentiating with respect to G and solving yields
G  fi (wi  Gi , Gi ) or gi  fi (wi  Gi , Gi )  Gi
Warm Glow (3)
• The donations function
G  fi (wi  Gi , Gi )
altruistic
egoistic
• The marginal propensity to donate is
fiG  fia  fie
• The marginal propensity to donate for altruistic
reasons is
fia  fi (wi  Gi , Gi ) (wi  Gi )
• The marginal propensity to donate for egoistic
reasons is
fie  fi (wi  Gi , Gi ) Gi
Warm Glow (4)
• The marginal propensity to donate is
fiG  fia  fie
• What is the sign of fie?
• If we cut G-i by $1 and increase wi by $1 the first
argument of fi() remains unchanged
• As wi=xi+gi the actor would spend some money on xi
and some on G so that G would fall
• If we cut wi 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
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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
30.4.2007
The EU Environmental Liability Directive
In addition to primary remedial measures:
• The use of resource-to-resource or service-toservice 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