Contingent Valuation Method (CVM)
• The contingent valuation method (CVM) is
used to estimate economic values for all
kinds of environmental goods and services.
• CVM can be used to estimate both use and
non use values.
• CVM is the most widely used method for
estimating non-use values.
• CVM is also the most controversial of the
non-market valuation methods.
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CVM- Overview
• CVM involves directly asking people, in a
survey, how much they would be WTP for
specific environmental goods or services.
• In some cases, people are asked for the
amount of compensation they would be
WTA to give up specific environmental
goods or services.
• It is called “contingent” valuation, because
people are asked to state their WTP or
WTA, contingent on a specific hypothetical
scenario and description of the
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environmental good or service.
CVM-Overview
• CVM is referred to as a “stated preference”
method, because it asks people to directly state
their values, rather than inferring values from
actual choices, as the “revealed preference”
methods do.
• CVM circumvents the absence of markets for
environmental goods and service by presenting
consumers with hypothetical markets in which
they have the opportunity to pay or accept
compensation for the environmental good or
service in question.
• The hypothetical market may be modelled after
either a private goods market or a political
market.
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CVM-Overview
• The fact that CV is based on what people
say they would do, as opposed to what
people are observed to do, is the source of
its greatest strengths and its greatest
weaknesses.
• Contingent valuation is one of the very few
ways to assign monetary values to non-use
values of the environment—values that do
not involve market purchases and may not
involve direct participation.
• These values are sometimes referred to as
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“passive use” values.
CVM-Overview
• They include everything from the basic life
support functions associated with ecosystem
health or biodiversity, to the enjoyment of a
scenic vista or a wilderness experience, to
appreciating the option to fish or bird watch
in the future, or the right to bequest those
options to your grandchildren. It also
includes the value people place on simply
knowing that giant pandas or whales exist.
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CVM-Overview
• It is clear that people are WTP for non-use,
or passive use, environmental benefits.
• However, these benefits are likely to be
implicitly treated as zero unless their
monetary value is somehow estimated.
• So, how much are they worth?
• Since people do not reveal their willingness
to pay for them through their purchases or
by their behaviour, the only option for
estimating a value is by asking them
questions.
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CVM-Overview
• However, the fact that the CVM is based on
asking people questions, as opposed to
observing their actual behaviour, is the
source of enormous controversy.
• The conceptual, empirical, and practical
problems associated with developing
monetary estimates of economic value on
the basis of how people respond to
hypothetical questions about hypothetical
market situations are debated constantly in
the economics literature.
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CVM-Overview
• CV researchers are attempting to address these
problems, but they are far from finished.
• Meanwhile, many economists, as well as
many psychologists and sociologists, for many
different reasons, do not believe the monetary
estimates that result from CV are valid.
• More importantly, many jurists and policymakers will not accept the results of CV.
• However, monetary values derived from CVM
are accepted as evidence in Court (since the
Exxon oil spill case, 1989)
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CVM- Design:Step 1
• The first step is to define the valuation
problem.
• This would include determining exactly
what environmental goods or services are
being valued.
• This would also include determining who
the relevant population is (local residents,
general public, visitors to the area).
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CVM- Design:Step 2
• The second step is to make preliminary
decisions about the survey itself.
• These include whether it will be conducted
by mail, phone or in person, how large the
sample size will be, who will be surveyed,
and other related questions.
• The answers will depend, among other
things, on the importance of the valuation
issue, the complexity of the question being
asked, and the size of the budget.
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CVM- Design:Step 2
• In-person interviews are generally the most
effective for complex questions, because it
is often easier to explain the required
background information to respondents in
person, and people are more likely to
complete a long survey when they are
interviewed in person.
• In some cases, visual aids such as videos or
colour photographs may be presented to
help respondents understand the conditions
of the scenario that they are being asked to
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value.
CVM- Design:Step 2
• In-person interviews are generally the most
expensive type of survey.
• Mail surveys that follow procedures that
aim to obtain high response rates can also
be quite expensive.
• Mail and telephone surveys must be kept
fairly short, or response rates are likely to
drop dramatically.
• Telephone surveys may be less expensive,
but it is often difficult to ask CV questions
over the telephone, because of the amount
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of background information required.
CVM- Design:Step 3
• The third step is the actual survey design,
which is accomplished in several steps.
• The survey design process usually starts
with initial interviews and/or focus groups
with the types of people who will be
receiving the final survey.
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CVM- Design:Step 3
• In the initial focus groups, the researchers
would ask general questions, including
questions about peoples’ understanding of
the issues related to the environmental good
or service, whether they are familiar with it
and the issues (e.g. threats, importance)
related to it, whether and how they value
this environmental good or service.
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CVM- Design:Step 3
• In later focus groups, the questions would get
more detailed and specific, to help develop
specific questions for the survey, as well as
decide what kind of background information
is needed and how to present it.
• For example, people might need information
on the location and characteristics of the site,
the uniqueness the environmental good or
service, and whether there are any
substitutes.
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CVM- Design:Step 3
• Researchers would also want to learn about
peoples’ knowledge of the human induced or
other threats to the environmental good or
service and their attitudes towards those
threats.
• Different approaches to the valuation question
and different payment mechanisms and
vehicles would be tested.
– Payment vehicles could be voluntary donations,
increase in taxes, increase in entrance fees.
– Payment mechanisms include: open ended,
payment ladder, single-bounded dichotomous
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choice, double-bounded dichotomous choice
CVM- Design:Step 3
• Questions that can identify any “protest”
bids or other answers that do not reveal
peoples’ values for the good or service of
interest would also be developed and tested
at this stage.
• Questions about the social and economic
characteristics of the respondents (e.g. age,
gender, education, income) to understand
what segment of the society value the
environmental good or service the
most/least.
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CVM- Design:Step 4
• The fourth step is the actual survey
implementation.
• The first task is to select the survey
sample. Ideally, the sample should be a
randomly selected sample of the relevant
population, using standard statistical
sampling methods.
• In mail surveys standard repeat-mailing and
reminder method should be used to get the
greatest possible response rate for the
survey.
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CVM- Design:Step 4
• Telephone surveys are carried out in a
similar way, with a certain number of calls
to try to reach the selected respondents.
• In-person surveys may be conducted with
random samples of respondents, or may use
“convenience” samples – asking people in
public places to fill out the survey.
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CVM- Design:Step 5
• The fifth and final step is to compile,
analyse and report the results.
• The data must be entered and analysed
using statistical techniques appropriate for
the type of payment mechanism.
• In the data analysis, the researchers also
attempt to identify any responses that may
not express the respondent’s value for the
environmental good or service.
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CVM- Design:Step 5
• In addition, they can deal with possible nonresponse bias in a number of ways. The
most conservative way is to assume that
those who did not respond have zero value.
• The impact of social and economic
characteristics on the respondents’ WTP can
also be investigated.
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CVM- Application
• Applying the contingent valuation
method is generally a complicated,
lengthy, and expensive process.
• In order to collect useful data and
provide meaningful results, the
contingent valuation survey must be
properly designed, pre-tested, and
implemented.
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CVM-Application
• CV survey questions must focus on specific
environmental good(s) and/or service(s) and
a specific context that is clearly defined and
understood by survey respondents.
• A CV survey to assess the monetary value
of the results of an environmental
improvement cannot be based on the
environmental improvement itself, but on
increases in specific environmental services
that the improvement is expected to
provide.
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CVM- Application
• The results of CV surveys are often highly
sensitive to what people believe they are
being asked to value, as well as the context
that is described in the survey.
• Thus, it is essential for CV researchers to
clearly define the services and the context,
and to demonstrate that respondents are
actually stating their values for these
services when they answer the valuation
questions.
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CVM-Application
A good CV study will consider the following
in its application:
1. Before designing the survey, learn as much
as possible about how people think about
the good or service in question. Consider
people’s familiarity with the good or
service, as well as the importance of such
factors as quality, quantity, accessibility, the
availability of substitutes, and the
reversibility of the change.
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CVM-Application
2. Determine the extent of the affected
populations or markets for the good or service
in question, and choose the survey sample
based on the appropriate population.
3. The choice scenario must provide an accurate
and clear description of the change
in environmental goods or services associated
with the event, program, investment, or policy
choice under consideration.
4. Convey this information using photographs,
videos, or other multi-media techniques, and
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written and verbal descriptions.
CVM-Application
5. Unlike ordinary survey questions, which
sometimes ask respondents whether they are
willing to pay £x to improve “air quality,”
the nature of the good or service and the
changes to be valued must be specified in
detail in a CV survey.
6. It is also important to make sure that
respondents do not inadvertently assume
that one or more related improvements are
included.
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CVM-Application
• For example, if people are asked to value
only air visibility, it would be important to
make sure that they do not include their
value for health-related improvements in
their stated WTP amount.
• Similarly, if people have a tendency to think
of environmental improvements in general,
even when asked about water quality alone,
it would be necessary to point out
specifically that environmental quality,
other than water quality, would remain the
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same.
CVM-Application
7. WTP Questions can be asked in a variety of
ways, using both open-ended and closedended formats.
– In the open-ended format, respondents are
asked to state their maximum WTP for the
environmental improvement.
– With the closed-ended format, also referred to
as discrete choice, respondents are asked
whether or not they would be WTP a particular
amount for the environmental improvement, or
whether they would vote yes or no for a
specific policy at a given cost. This format is
generally accepted as the preferred method.
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CVM-Application
8. In addition to the hypothetical question that
asks for WTP, the survey must specify the
mechanism by which the payment will be
made, for example through increased taxes
or a donation. In order for the question to
be effective, the respondent must believe
that if the money was paid, whoever was
collecting it could effect the specified
environmental change.
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CVM-Application
9. Respondents should be reminded to
consider their budget constraints.
10. Specify whether comparable goods
or services are available from other
sources, when the good is going to be
provided, and whether the losses or
gains are temporary or permanent.
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CVM-Application
11. Respondents should understand the
frequency of payments required, for
example one-off, monthly or annually, and
whether or not the payments will be
required over a long period of time in order
to maintain the quantity or quality
change. They should also understand who
would have access to the good and who else
will pay for it, if it is provided.
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CVM-Application
12. The scenario should clearly indicate
whether the levels being valued are
improvements over the status quo, or
potential declines in the absence of
sufficient payments.
13. If the household is the unit of
analysis, the reference income should
be the household’s, rather than the
respondent’s, income.
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CVM-Application
14. Thoroughly pre-test the valuation
questionnaire for potential biases. Pretesting includes testing different ways of
asking the same question and testing
whether the question is sensitive to changes
in the description of the good or resource
being valued.
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CVM-Application
15. Include validation questions in the survey, to
verify comprehension and acceptance of the
scenario, and to elicit social and economic and
attitudinal characteristics of respondents, in order
to better interpret variation in responses across
respondents.
16. CVM can be conducted as in-person interviews,
telephone interviews or mail surveys. The inperson interview is the most expensive survey
administration format, but is generally considered
to be the best approach, especially if visual
materials are to be presented.
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CVM-Application
17. Interview a large, clearly defined,
representative sample of the affected
population.
18. Achieve a high response rate and a
mix of respondents that represents the
population.
19. The survey results should be
analysed and interpreted using
statistical methods.
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CVM-Advantages
• CVM can estimate the TEV of
environmental goods and services.
• A lot of care should be taken while
designing CV surveys and analysing data,
however it is not a difficult method.
• CV has been widely used, and a great deal
of research is being conducted to improve
the methodology, make results more valid
and reliable, and better understand its
strengths and limitations.
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CVM-Advantages
• CV is enormously flexible in that it can be
used to estimate the economic value of
virtually anything. However, it is best able
to estimate values for goods and services
that are easily identified and understood by
respondents.
• CV is the most widely accepted method for
estimating TEV, including all types of nonuse, or “passive use,” values. CV can
estimate use values, as well as existence
values , option values , and bequest values .38
CVM-Limitations
• Although the CVM has been widely
used for the past two decades, there is
considerable controversy over whether
it adequately measures people's
WTP/WTA for environmental quality.
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CVM-Limitations
• People have practice making choices with
market goods, so their purchasing decisions in
markets are likely to reflect their true
willingness to pay. CV assumes that people
understand the good in question and will
reveal their preferences in the contingent
market just as they would in a real
market. However, most people are unfamiliar
with placing monetary values on
environmental goods and services. Therefore,
they may not have an adequate basis for
stating their true value (“hypothetical bias) 40
CVM-Limitations
• The expressed answers to a WTP/WTA
question in a CV format may be biased
because the respondent is actually
answering a different question than the
surveyor had intended. Rather than
expressing value for the good, the
respondent might actually be expressing
their feelings about the scenario or the
valuation exercise itself.
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CVM-Limitations
• For example, respondents may express a
positive WTP because they feel good about
the act of giving for a social good (referred
to as the “warm glow” effect), although they
believe that the good itself is unimportant.
• Respondents may state a positive WTP in
order to signal that they place importance
on improved environmental quality in
general.
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CVM-Limitations
• Alternatively, some respondents may value
the good, but state that they are not WTP for
it, because they are protesting some aspect
of the scenario, such as increased taxes or
the means of providing the good.
• Respondents may make associations among
environmental goods that the researcher had
not intended. For example, if asked for
WTP for improved visibility (through
reduced pollution), the respondent may
actually answer based on the health risks
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that he or she associates with dirty air.
CVM-Limitations
• Some researchers argue that there is a
fundamental difference in the way that
people make hypothetical decisions
relative to the way they make actual
decisions.
• For example, respondents may fail to
take questions seriously because they
will not actually be required to pay the
stated amount.
44
CVM-Limitations
• Responses may be unrealistically high
if respondents believe they will not
have to pay for the good or service and
that their answer may influence the
resulting supply of the good.
• Conversely, responses may be
unrealistically low if respondents
believe they will have to pay (freeriding).
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CVM-Limitations
• The payment question can either be phrased
as the conventional ‘What are you WTP to
receive this environmental asset?’, or in the
less usual form, ‘What are you WTA in
compensation for giving up this
environmental asset?’
• In theory, the results should be very
close. However, when the two formats have
been compared, WTA very significantly
exceeds WTP. Critics have claimed that this
result invalidates the CVM approach.
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CVM-Limitations
• If people are first asked for their WTP for
one part of an environmental asset and then
asked to value the whole asset, the amounts
stated may be similar. This is referred to as
the “embedding effect.”
• In some cases, people’s expressed WTP for
something has been found to depend on
where it is placed on a list of things being
valued. This is referred to as the "ordering
problem."
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CVM-Limitations
• Respondents may give different WTP
amounts, depending on the specific
payment vehicle chosen.
• For example, some payment vehicles, such
as taxes, may lead to protest responses from
people who do not want increased taxes.
• Others, such as a contribution or donation,
may lead people to answer in terms of how
much they think their “fair share”
contribution is, rather than expressing their
actual value for the good.
48
CVM-Limitations
• Many early studies attempted to prompt
respondents by suggesting a starting bid and
then increasing or decreasing this bid based
upon whether the respondent agreed or
refused to pay a such sum. However, it has
been shown that the choice of starting bid
affects respondents’ final WTP response.
• Strategic bias arises when the respondent
provides a biased answer in order to
influence a particular outcome.
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CVM-Limitations
• Information bias may arise whenever
respondents are forced to value attributes
with which they have little or no
experience. In such cases, the amount and
type of information presented to
respondents may affect their answers
• Non-response bias is a concern when
sampling respondents, since individuals
who do not respond are likely to have, on
average, different values than individuals
who do respond.
50
CVM-Limitations
• Estimates of non-use values are difficult to
validate externally.
• When conducted to the exacting standards
of the profession, contingent valuation
methods can be very expensive and timeconsuming, because of the extensive pretesting and survey work.
• Many people, including jurists policymakers, economists, and others, do not
believe the results of CV.
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CVM-Example I
• Exxon Valdez oil spill (1989) is caused
by the oil tanker running into the rocks
releasing 11 million gallons of crude oil
• Largest oil spill in US waters resulted in
environmental damage of
unprecedented proportions
52
CVM-Example I
• CVM and non-use (passive use) values
entered the dictionary of economics, law
and public policy
• US court decided that damage claim for
environmental losses should also include
passive use values
• Most of the damages from the spill was
passive use since active use of the area was
modest
• State of Alaska sued Exxon for natural
resource damage for lost passive use value 53
CVM-Example I
• The only environmental valuation method
that can estimate passive use values is CVM
• A CV study was carried out to estimate the
loss of passive use value from Exxon
Valdez spill
• Respondents were asked their WTP to
prevent a future accident that would cause
an equivalent damage in the same area
• 1472 respondents randomly sampled from
the US population took part in the CV
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survey
CVM-Example I
• CV survey was carefully designed to
minimise CV limitations
–
–
–
–
–
–
–
Use of probability sampling
Referendum elicitation format
In person interviews with cards photos and maps
Accurate description of the valuation scenarios
Checks on understanding and acceptance
Yes/no follow up questions
Careful pre-testing
55
CVM-Example I
• Median WTP was found to be $27-46 and
mean $67-220
• WTP increases with the respondents’
income, likelihood of visit to Alaska,
environmentalism, attitude for conservation
of wilderness, perception of importance of
the accident
• Total passive use values amount to $2.819.33 billion
56
CVM-Example I
• Exxon in fear of the large size of the
damage claims being made against it funded
a study to discredit CVM
• National Oceanic and Atmospheric
Administration (NOAA- the government
body that is responsible for issuing
regulations on the assessment of damage
from oil spill) formed a panel consisting of
distinguished economists to consider
criticisms of CVM and make
recommendations to NOAA
57
CVM-Example I
• Panel agreed that CVM is valid if the
following recommendations are taken into
account:
–
–
–
–
–
–
Dichotomous choice format
Minimum response rate of 70%
In person interviewing
WTP rather than WTA
Sensitivity to scope is accounted for
Respondents are reminded of their budget
constraints
58
CVM-Example II
• Cheimaditida wetland is located 40 km
Southeast of Florina in Northwest Greece
• This wetland includes Lake Cheimaditida,
one of the few remaining freshwater lakes
in Greece, and constitutes a total catchment
area of 168 km2 surrounded by extensive
marshes with reeds
• The wetland is very rich in biodiversity
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CVM-Example II
• It supports six habitat types of Annex I of the EU
Habitats Directive (92/43/EEC), one of which is a
priority natural habitat under Article 1
• It is very rich in flora diversity (there are 150
relatively rare plant species in the wetland, 6 of which
are listed under CITES).
• It also supports a wide array of fauna diversity
including several mammals, amphibians, reptiles and
fish, most of which are listed in Annex II and IV of
the EU Habitats Directive (92/43/EEC).
• It is a recognised Important Bird Area and
approximately 140 bird species have been identified,
most of which are under protection and three are
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globally threatened
CVM-Example II
• Agriculture is the vital economic activity in
the catchment
• Water extraction from the lake for irrigation
in agriculture and water pollution due to
run-off from agricultural practices are
adversely affecting water quantity and water
quality in the wetland.
• These in turn affect the level of biodiversity
that the wetland is able to support
61
CVM-Example II
• Previous study have estimated the use values
of the various wetland functions (including
flood water retention, food web support,
ground water recharge, nutrient export, and
sediment retention) to the local population by
using CVM.
• Aim: To estimate the non-use values the
wetland generates to the Greek public by using
a CVM. To calculate the TEV of the wetland
and to carry out a CBA to inform policy
makers about efficient and effective means of
its restoration, conservation and sustainable 62
management.
CVM-Example II
• To carry out a CE we need to determine
– The non-use attributes of the wetland that are
important to the public.
– The relationship between the threats to the
wetland’s ecological functions and the
important wetland attributes
• We have carried out
– Focus groups with Greek public
– Consultations with scientists
– Extensive literature review
63
CVM-Example II
• Important non-use attributes of the
wetland included
– biodiversity
– open water surface area
– educational and research extraction
– local employment
64
CVM-Example II
• Three scenarios were constructed
– Scenario A: No management. BAU, expected
conditions in 5 years
• Biodiversity: Deteriorating to low level i.e., a 10%
decline in population, size of habitats, and loss of
one endangered species
OWSA: Declining i.e., a 3-10% reduction in open
water surface area.
• E and R:Deteriorating i.e., a reduction in the
educational and research extraction possibilities as a
result of a lack of investment in existing facilities.
65
• Employment: Loss of 65 agricultural jobs
CVM-Example II
– Scenario B: Managing the wetland to maintain current
conditions
• Biodiversity: Maintain the current level (150 rare plants
species, 140 bird species -3 are threatened, 11 mammals, 7
amphibians, 7 reptiles, and 8 fish
• OWSA: Maintain the current open water surface area (20%
open water, remaining 80% covered by reed beds).
• E and R: Maintain the current levels of educational and
research extraction (by sustaining existing facilities, which
include a small hut and 2 informational posters).
• Employment: No change
66
CVM-Example II
– Scenario C: Managing the wetland to improve
current conditions
Biodiversity:Increase to a higher level i.e., a 10%
increase in population and size of habitats.
OWSA: Increase open water surface area to 60%
• E and R: Improve the level of educational and
research extraction by providing better facilities, i.e.,
larger building, microscopes, books, information
leaflets, binoculars, posters etc.
• Employment: Retraining of 150 farmers
67
CVM-Example II
• Respondents were asked if they are WTP to
move from A to B and A to C and if yes, how
much they are WTP.
• The payment vehicle is a one off donation
which will go to a Lake Cheimeditida
conservation to be managed by the local
NGO
• Respondents were reminded of their budget
constraints, substitute sites, were shown
photos and maps and were given enough
information about the site that is being valued
68
CVM-Example II
• Data from 100 respondents were collected in
face to face surveys in January 2005
• Data on the respondents social and
demographic characteristics were collected
• 82% of the respondents indicated that they are
WTP to maintain current conditions (move
from A to B)
• 74% of the respondents stated that they are
WTP to improve the current conditions (move
from A to C)
69
CVM-Example II
• Regression analyses revealed that
– Age, income and the education level of
the respondents were positively and
significantly correlated with their WTP
for wetland conservation scenarios
– The mean WTP to move from scenario A
to B was €18 with a median of €10 and
the mean WTP to move from scenario A
to C was €24, with a median of €12.50
70