A while back we started an introductory series on the methods environmental economists use to value environmental goods and services. In previous posts, we have looked at the theory of benefit estimation, the travel cost method, the hedonic method and the averting behavior method. We continue the series with perhaps the most popular and controversial of the methods: the contingent valuation method, or CV for short.
Whenever I wanted something growing up, my parents would insist "Don't beat around the bush, just ask." When we're valuing environmental benefits, the travel cost method, the hedonic method and the averting behavior method 'beat around the bush.' All three methods look for clues to the value of the environment in related markets. For example, using the hedonic housing price method we might estimate the value of changes in local air quality by looking at changes in the value of the local housing stock. Why do we beat around the bush? For environmental changes, there are no direct markets to assign values.
Instead of using related markets to derive environmental values practitioners of the CV method 'just ask' people what they are willing to pay to prevent environmental degradation or improve environmental quality [1]. CV practitioners construct hypothetical market scenarios and use surveys to find out how people would respond if placed in a market situation.
For example, CV practitioners might ask a sample of respondents: What is the maximum amount you would be willing to pay to reduce particulate matter by 10%? Because open-ended questions of this type suffer from seriously problems--mainly that respondents are free to say any value they want--practitioners have tended to rely on questions that are more familiar to respondents: Would you be willing to pay $10 to reduce particulate matter by 10%? By framing the question in terms of the familiar purchase/don't purchase decisions, responses have been demonstrated to be more reliable. Obviously, much more goes into a CV survey than just asking one simple question, but the direct questioning approach has proven powerful in estimating the value of environmental changes that were previously inestimable.
Because CV is simple, direct and easily understood, the method is prolific. Although an exact count isn't available, it is safe to say there are well over 3,000 published applications of the CV method applied to environmental problems. However, CV's simplicity is probably also it's greatest flaw. The correct use of CV requires extensive testing of questionnaires and responses to ensure the reliability and defensibility of the resulting value estimates. A well-designed CV survey can be expensive and time consuming.
Perhaps the most prominent example of the CV method is the natural resource damage assessment after the Exxon Valdez oil spill in 1989. Following the oil spill in Prince William Sound, teams of economists used the CV method to estimate the economic damages from the spill. The economists report a lower bound estimate on willingness to pay to prevent another oil spill similar to the Valdez of $2.8 billion with a mean estimate of $7.2 billion.
Given the magnitude of these numbers and the controversy generated by the technique itself, in 1993 the National Oceanic and Atmospheric Administration commissioned a Blue Ribbon Panel to answer the question 'Is CV a valid method for determining the lost economic value from natural resource damages?' The panel featured many prominent economists, including two Nobel Prize winners, Kenneth Arrow and Robert Solow and heard the testimony some of the most prominent advocates and critics of the CV method. In their final report, the members of the NOAA Blue Ribbon Panel concluded that the CV method can produce reliable estimates of the lost value from natural resource damages provided researchers meet a high standard of proof. Meeting this standard has proven to be the challenge.
[1] We could also talk about willingness to accept compensation for environmental degradation or forego an improvement, but for this introduction we will focus on willingness to pay. We will save the willingness to pay and willingness to accept debate for later.
