We assume in economic theory that the preferences of consumers will determine their welfare. It is sometimes necessary to place a value on those preferences. When an event occurs which has an effect which can’t solely be valued through market prices, another valuation method is required. This occurred in 1989, where an oil tanker, the Exxon Valdez, ran aground in Alaska spilling millions of gallons of oil into the sea. Fishing suffered as a result, but there were other consequences of the spill; these needed to be valued to get an accurate picture of any compensation levels.
CVM’s ‘popularity’ as a valuation method has grown over recent years; the concept of this growth has been the acceptance that “preserving and improving the environment is never a free option” (Pearce et al 1989) in addition to the realisation that the environment does have an effect on peoples welfare, and to maximise people’s welfare, the environment becomes a major factor. For any environmental resource, there are different use values; direct use values are those values which come from direct usage of the resource.
Indirect use values refer to benefits people indirectly derive from the resource, for example through ecological functions. The value placed by people who don’t use a value now but would like to keep the possibility of future use are called option values. Altruistic values, where other individuals’ use of the resource is valuable; bequest values for leaving the resource for future generations; and existence values where we value just having the resource there all come into non-use values. The Contingent Valuation Method (CVM) is a method of placing a monetary value on non-market ones; otherwise known as passive use values.
The CVM is used to estimate economic values for environmental services. The method is essentially a direct approach – to ask people their valuation of an environmental good. This is done by asking what value they would be willing to pay for an environmental benefit, or willing to accept to receive as compensation to tolerate a cost. Evidently, people value environmental resources, and a valuation is needed if the resource is somehow violated, but because they are essentially public goods without a monetary market, we need to know what value we can place on it.
Because the environment is public, it has non-rival and non-exclusive consumption properties. Everyone has free access to the good, as such their benefits would be treated as zero, unless people are actually asked what value they have. It is referred to as a stated preference method, because it asks people to directly state their values. The methods of surveying, interpretation and evaluation are discussed later, but the values given by those surveyed are used to give the monetary amount of the total economic value of the resource.
The CVM is an attempt to place a value on those aspects of people’s own preferences and valuations of an environmental resource which would otherwise monetarily be treated as zero. It can be argued that we can not place a monetary value on a clean and sustainable environment. Animals and environmental resources have a value which doesn’t apply to humans, their own intrinsic value; their right to exist. The environment is not a commodity and as such, can not be treated as one.
However in the case of the Exxon Valdez oil spill, it was evident that the human, non human and environmental costs could not be accurately measured just by the cost of the clean up operation and loss to the fishing and shipping industries; the CVM had to be used, even if it could just be seen as an attempt to place monetary value on the total environmental damage caused by the spill. The aim of the CVM was to create valuations (estimations), which are close to those that would occur if the market existed. Part 2:
CVM was used in the evaluation of the Exxon Valdez spill, and due to the high interest in the case, it has become one of the most high profile, but most controversial valuation methods. The method of how the CVM is conducted is the first major discussion. CVM estimates the value of non-market goods by using surveys that directly ask the value of the good. In the market for a normal good, people have an idea of what value they can place on the good, and so we get their true Willingness To Pay (WTP) from their actions (with Exxon Valdez, the mean WTP was found to be $30 to stop it happening again).
However no consumer will know what value they place on environmental resources; they do not know if i?? 30 is or i?? 1000 is appropriate when considering the protection of an environmental resource. CVM attempts to give consumers a good starting place for a value. The first step of the CVM is to define the valuation problem. This would be determining exactly what services are being valued, and who the relevant population is. They are establishing a hypothetical market.
They have to make preliminary decisions about the survey itself, deciding how the CVM will be conducted, how large the sample size will be, who will be surveyed, and other factors. Person to person interviews are seen as the most effective, however they are very costly. Telephone interviews, mail questionnaires and other methods may be used, but the results attained through this method may not be as accurate as the personal interviews, which will be more effective in description and setting up of the survey.
The surveyors will need to make sure those surveyed will be exactly clear on what they are valuing; the location, the effects of the hypothetical market and so on. An exact method of payment, be it a one off payment, taxes, price increases, also need to be decided. The CVM is also tested on small groups to assess the quality of the survey, before it is used on the relevant survey population. Evidently a poorly designed study will produce unreliable estimates of the valuation.
What is unknown is if the weaknesses that are apparent with CVM are because of the actual calculation method, or if they could be fixed with an appropriately designed survey. The CVM is a stated preference model where people state what they would pay. This is seen as a major weakness of the model as it is only hypothetical. Those surveyed will have no reference to guide them as to how much to state. The way in which the survey is designed may have an effect on how much the people will state as their valuation, possibly through leading questions.
Also, the people know themselves that they won’t actually have to pay the money, and so will be more willing to state a higher preference value. To get a value of WTP or WTA, an individual may be asked to name an amount; an open ended survey. This is comes with the problem of individuals not knowing how much they should state. Secondly, they could be given an amount, and they respond with a yes or no. Values rise until a maximum WTP or fall until a minimum WTA is reached. There is often starting point bias here as the initial value given by the survey may influence what value the person may eventually accept.
The wording of the questions would be an important factor. One concern could be who actually conducts the survey. Had the oil company produced it, it could have been worded in such a way as to bias any results toward a low compensation. The opposite could occur if the surveyors were environmentalists. With Exxon Valdez, if the individuals were asked their WTP to avoid the spill and were also told the spill was could indirectly effect their water supplies or could alternatively increase oil prices, this would affect their valuation compared to if they had simply been asked for their valuation without the extra information about the spill.