Contingent Valuation- By Vr Avinash Kulkarni

Saturday Brain Storming Thought (86) 07/11/2020- By Vr Avinash Kulkarni

Contingent Valuation

Contingent Valuation is a survey based method of determining the economic value of a nonmarket resource

It is used to estimate the value of resources and goods not typically traded in economic markets

It is most commonly related to natural and environmental resources

Contingent meaning

Adjective, dependent for existence, occurance, character, etc, on something not yet certain, conditional (often followed by on or upon)

Our plans are contingent on the weather

Liable to happen or not, uncertain

Weakness of contingent valuation

It is the bias that may be introduced by individuals who have motives other than ensuring the accuracy of the results

The survey methodology may give too much weight to the type of people who answer such surveys, thereby producing inaccurate results

Overview of Contingent valuation method

1) it is used to estimate economic values for all kinds of ecosystem and environmental services

2) it can be used to estimate both use and non use values

3) it is most widely used method for estimating non-use values

4) it is most controversial of the non-market valuation methods

5) it involves directly asking people, in a survey, how much they would be willing to pay for specific services

6) survey of amount of compensation willing to accept

7) for contingent valuation – source of its greatest strength and it’s greatest weakness

8) the importance of non-use values, and their potentially significant levels

Application of the Contingent Valuation Method

Step 1

1) define valuation problem

2) determining exactly what services are being valued

3) who the relevant population is

4) resource to be valued is S specific site

Step 2

1) make preliminary decisions about the survey itself

2) decide sample size to be surveyed and other related questions

3) answer depends on importance of valuation issue, complexity of question and size of budget

4) in person interviews, mail surveys, telephonic surveys

Step 3

1) actual survey design

2) detailed and specific questions

3) location and characters of site

4) describe the hypothetical scenario

Step 4

1) actual survey implementation

2) selection of survey sample

3) using standard statistical sampling method

4) asking people in public places to fill out the surveys

Step 5

1) compile, analyze and report the results

2) data must be entered and analyze using statistical techniques appropriate for the type of question

3) in the data analysis, the researchers also attempt to identify any responses that may not express the respondants value for services of the site

4) deal with possible non-response value for the services of life

5) assume that those who did not respond have zero value

Advantages of Contingent Valuation Method

1) enormously flexible

2) it can be used to estimate the economic value of virtually anything

3) it is best able to estimate values for goods and services that are easily identified and understood by users and that are consumed in discrete units

4) useful for estimating total economic value including all types of non-use or passive-use values

5) CV can estimate use values as well as existence values, option values and bequest values

6) result of CV studies are easy to analyze and describe

7) 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 it’s strength and limitations

Limitations of Contingent Valuation Method

1) considerable controversy over whether adequately measures people’s willingness to pay

2) many peoples may not have an adequate basis for stating their true value

3) expressed answers to a willingness to pay may be biased

4) responses may be unrealistically low or high

5) Respondents may give different willingness to pay amount

6) choice of starting bid affects Respondent’s final willingness to pay

7) baised answers give wrong result

8) estimates of non-use values are difficult to validate externally

9) when conducted to the existing standards of profession, contingent valuation methods can be very expensive and time consuming because of the extensive pre-testing and survey work

10) many people, including jurists policy-makers, economists and other do not believe the results of contingent valuation

WTA
(willing to accept compensation)

The minimum amount willing to accept by affected people as compensation is regarded as a measure of the value of loss suffered by them

it is dependent on the income of an individual

WTP
(willing to pay)

People derive benefit or satisfaction from something which they prefer to have – then they are prepared to pay a price for it

WTP for something also determine the prevailing market price if there are no distortions in the market

Use of Contingent Valuation

1) benefits that cannot be brought or sold, such as scenic views

2) things that people may never use, such as wilderness areas (existence value)

3) things that benefit others, such as highway overpasses to preserve wildlife habitat

4) services or products that do not yet exist

Key issues of Contingent valuation method

1) it is based on what people say they would do (stated preference)

2) it is not an appropriate method if the value can be estimated based on outside, quantifiable factors

3) result is based on designed and executed survey

4) designing and analyzing a contingent valuation survey requires specialized skills

5) execution of survey can be expensive

Survey questions for contingent valuation

1)open-ended – Respondent’s are asked to state their maximum willingness to pay for the improvement

2) Closed-ended – Respondent’s are asked whether or not they would be willing to pay a particular amount for the benefit

3) Contingent choise – the respondents can also be offered a number of benefit alternatives

4) Bidding – Respondent’s are asked to bid for benefit in an auction

5) payment card method – Respondent’s are given a card with a number of values

Validity

Sample represents the people to whom the benefits would accrue or the people whose judgement is most relevant to the situation

The extent to which Respondent’s understand the context in which the benefit will be experienced

People are willing to pay for something they value

Contingent ranking

It is to give a set of alternatives which consists of a given amount or a given level of a specific good and a corresponding realistic price

The alternatives specified in advance are then ranked by the respondent during the interview

Pros of contingent valuation

1) based on economic utility theory and can produce reliable estimates

2) most biases can be eliminated by careful survey design and implementation

3) currently the only method available to measure important nonuse values associated with natural resources

4) has been used successfully in a variety of situations

5) is being constantly improved to make the methodology more reliable

Cons of Contingent valuation

1) estimates of nonuse values are difficult to validate externally

2) stated intentions of willingness to pay may exceed true feelings

3) results may appear inconsistent with tenets of rational choice

4) Respondents may be unfamiliar with the good or service being valued and not have an adequate basis for articulating their true value

5) Respondants may express a value for the satisfaction (warm glow) of giving rather than value of the goods or service in question

6) respondents may fail to take questions seriously because the financial implications of their responses are not binding.

Compiled by:-

Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer

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