Unit 5

UNIT 5
The economic valuation methods

5.1. Criteria to classify the valuation methods
5.2. Revealed and stated preference methods
5.3. Designing a CV study: an example
(20521) Environmental Economics in Tourist Areas

UNIT 5


Neoclassical economics has tools to measure the value
a consumer assign to a good:
Marketed good: we observe its price (we can estimate its

demand function).

demand function).
Non-marketed goods.

demand function).
Non-marketed goods.
Can we measure the value of an un-priced ‘negative good’ (a

bad) which, due to price’s absence, is not efficiently assigned by
the market?
Example: air pollution
Can we measure the value of a good that society can freely use
without buying it in a market?
Example: a natural park


demand function).
Non-marketed goods.
Can we measure the value of an un-priced ‘negative good’ (a

bad) which, due to price’s absence, is not efficiently assigned by
the market?
Example: air pollution
Can we measure the value of a good that society can freely use
without buying it in a market?
Example: a natural park

Criteria to classify valuation methods
We will use two dimensions:
How data are collected:
Is the valuation method using real data (i.e. basing on

revealed economic behaviour) or hypothetical data (i.e.
basing on responses stated in a survey).


The type of monetary valuation:
Are monetary values directly obtained or indirectly

estimated through use of some method of data
analysis?

The type of monetary valuation:
Are monetary values directly obtained or indirectly

estimated through use of some method of data
analysis?
Classification by Mitchell R.C. and Carson R.T. (1989)
OBSERVED HYPOTHETICAL
BEHAVIOUR BEHAVIOUR
• Market prices • Contingent valuation
DIRECT • Simulated or experimental

markets
• Production function approaches

(valuing the environment as an
• Contingent behaviour
input into firm’s production)
• Conjoint analysis (attribute
• Household production function:
based methods as choice
o Defensive expenditure or experiments or contingent
averting behaviour ranking)
INDIRECT (avoidance expenditures)
o Cost of illness
o Travel cost
o Hedonic pricing (property

value and wage models)
Valuation methods/ SP vs. RP methods
What are the main ways in which non-market values

for the environment can be estimated?
The two main types of approach are:
 Stated preference: directly asking people about

the values they place on a change in environmental
quality/quantity. Examples of such methods we will
look at are contingent valuation and choice
experiments
BEHAVIOUR BEHAVIOUR

markets

o Cost of illness
o Travel cost

Valuation methods/ SP vs. RP methods
What are the main ways in which non-market values

for the environment can be estimated?
The two main types of approach are:
 Stated preference: directly asking people about

the values they place on a change in environmental
quality/quantity. Examples of such methods we will
look at are contingent valuation and choice
experiments
 Revealed preference: inferring environmental

values from people's behaviour in related markets.
Examples of such methods we will look at are travel
cost models and hedonic pricing.
BEHAVIOUR BEHAVIOUR

markets

• Household production
function:
experiments or contingent
o Defensive expenditure or ranking)
INDIRECT averting behaviour
(avoidance expenditures)
o Cost of illness
o Travel cost

Valuation methods/ direct vs. indirect utility impacts
SP and RP approaches look for the direct, utility impact of

the environment on people.
Note there are also “indirect” valuation approaches, such

as the production function method and ecosystem services
valuation approaches: these consider the value of the
environment as an “input” to economic activity/well-being.
BEHAVIOUR BEHAVIOUR

markets
• Production function
approaches (valuing the
environment as an input into
firm’s production) • Conjoint analysis (attribute
o Cost of illness
o Travel cost

Production function (PF) approaches:
Model the behaviour of producers and their response to

changes in environmental quality (Q) that influence
production
Also called “valuing the environment as input”:
>> Assumption: Q is a factor input into the production

of a marketed good that yields utility
>> Changes in the availability of Q can affect the costs

and supply of the marketed good, use of other factor
inputs, or both
Dose-response and change-in-productivity models can

be considered special cases of the PF approach: we
economically measure these changes.
Which method should be used??
Depends on:
The purpose of the valuation.
The relationship among the variables entering the utility

function of individuals?
UNIT 5


BEHAVIOUR BEHAVIOUR

markets

• Household production
function:
o Cost of illness
o Travel cost

Revealed preference methods (RP)
RP methods inferred monetary values from actual choices

people made in markets:
Weakly separability of utility function
Main hypothesis: the level of Q has an effect on

individuals’ behavior and choices.
>> Infer the monetary value by analysing market

choices of individuals.
Separability of the utility function
Weakly separable: the MRS between one good in X

(x1) and Q does not depend on consumption of
whatever good in Y (y1).
u  u x1 , Q , u y1 
Relationships between x1 and Q):
1) Substitution: changes in Q affect x1 in the opposite

way
2) Complementarity: changes in Q affect x1 in the

same way
Demand function for many environmental services (Q)

can only be indirectly ‘observed’, that is, observed
through changes in the consumption of marketed
goods in X (due to changes in px) that have a
substitution/complementarity relationship with Q.
Involve modelling consumer behaviour
The household combines…
purchases of + availability of nonmarket

marketed goods environmental services
…through a set of technical relationships to “produce” a

utility yielding final good or service
Assumption: substitution or complementarity

relationship (ecosystem service vs. marketed
commodities)
Ex.: contaminated drinking water

A household could invest time and money in purchasing

market goods aimed at providing drinkable water (e.g.
investment in technology, bottled water)
The averting behaviour approach: the household

attempts to avoid exposure to a degraded drinking water
system
Averting behaviour models are used to evaluate the WTP

of individuals for improved health or to avoid undesirable
health consequences
A household could invest time and money in purchasing

market goods aimed at providing drinkable water (e.g.
investment in technology, bottled water)
The averting behaviour approach: the household

attempts to avoid exposure to a degraded drinking water
system
Averting behaviour models are used to evaluate the WTP

of individuals for improved health or to avoid undesirable
health consequences
Hedonic methods: analyse how marketed good charac-

teristics, including Q, might affect the price of the good
This type of analysis provides estimates of the implicit

prices paid for each characteristic.
The most common application: real estate sales
Residential property sale prices can be decomposed into

implicit prices for:
- the characteristics of the house

- the characteristics of the neighbourhood
- environmental quality characteristics
- etc.
Hedonic wage models:
Analyse the relationship between wages and job

characteristics (risk of death, position, industry, risk of
injury, location, etc.)
Researchers hope to isolate the part of the wage that is

compensating for the risk of death on the job
Ex.: to infer the value of health benefits, risk of death,

the value of a statistical life (VSL), etc.
Travel Cost Method:
The model we will use to answer these questions is built

on the fact each individual visiting the natural area
assumes a travel cost to access it.
The value of the recreational site will be estimated on

the basis of individuals’ responses to the implicit price
of the visit.
Limitations of revealed preference methods:
Inability to estimate non-use values
Inability to estimate values for levels of environmental

quality that have not been experienced by individuals
(ex-ante valuations)
People may not have full information when they make

purchase decisions: in this case, they would not reveal
the true preferences.
BEHAVIOUR BEHAVIOUR

markets

o Cost of illness
o Travel cost

Stated preference methods (SP)
SP approaches rely on answers to carefully worded

survey questions (answers can be monetary amounts,
choices, ratings, etc.)
Those answers are scaled following an appropriate

model of preference to yield a measure of value
The valuation context is described in a survey

instrument (questionnaire):
>> It is possible to describe new goods, limit the choice

set, use hypothetical markets, etc.
Offer possibilities for valuation well beyond RP methods
Some economists tend to distrust people’s willingness

or ability to answer questions truthfully and carefully!
BEHAVIOUR BEHAVIOUR

markets

o Cost of illness
o Travel cost

Contingent valuation method (CVM) is the most widely

used and the most controversial SP method:
Survey-based method
Elicits values people place on non-market goods,

services and amenities (e.g. a change in environmental
quality):
Ex.: How much would you be willing to pay for a X change in

the quality of good Z?
Advantages:
>> We don’t need to model the behaviour (or choices)

of individuals
>> CVM can measure any component of the TEV

(including non-use values and ex-ante valuations)
Contingent valuation method (CVM):
Hypothetical: answers stated by surveyed individuals
Translates into monetary units benefits and costs

individuals get from changes in provision of a public
good.
The questionnaire plays the role of an hypothetical

market:
>> Surveyor = supply side of the market

>> Surveyed individual = demand side
CVM fills a gap: when markets do not exist and RP

methods are not applicable!!
CVM has a wide range of applicability:
Public administration, courts, environmental groups,

etc.
Almost any good or environmental service
- Ex-ante and ex-post valuation studies
- Use and non-use values
Can be used when the utility function is strongly

separable or non-separable.
CVM has to be consistent with economics principles:
Rational behaviour of individuals: they have

preferences and maximize their utility  consumer
sovereignty principle
Aggregation of individual preferences: Kaldor-

Hicks compensation principle according to which there
is no need winners compensate losers –to undertake
the project it is enough compensation is possible.
Issues of special concern usually criticized:
- WTP versus WTA

- Perception of the budget constraint
- Information provided to respondents
- Aggregation of the valuation
- Response format…
CVM has to be consistent with the economics principles:

preferences and maximize their utility
Aggregation of individual preferences: Pareto

criterion and criterion of potential Pareto improvement
(Kaldor and Hicks, 1939) according to which there is no
need winners compensate losers –it is enough
compensation is possible to undertake the project.
- WTP versus WTA

WTP vs WTAC
Standard view is that these should be very close when income

effects small and expenditure on good is small percentage of
income. But, even in these circumstances, CVM experiments
(and real payment experiments) show WTP<<WTAC. Why
should this be? Two explanations:
1) Loss Aversion (Kahneman, Knetsch, Thaler)
People value current entitlements more highly than

prospective gains; losses thus valued more highly than
equivalent gains (WTAC usually associated with a loss of
the good, WTP associated with acquisition of the good)
Kahneman and Tversky (1984) call loss aversion an asymmetry of

value which has to do with the fact that the disutility of giving up
an object is greater than the utility associated with acquiring it.
WTP vs WTAC
Standard view is that these should be very close when income

effects small and expenditure on good is small percentage of
income. But, even in these circumstances, CVM experiments
(and real payment experiments) show WTP<<WTAC. Why
should this be? Two explanations:
1) Loss Aversion (Kahneman, Knetsch, Thaler)
People value current entitlements more highly than

prospective gains; losses thus valued more highly than
equivalent gains (WTAC usually associated with a loss of
the good, WTP associated with acquisition of the good)
2) Substitution effects (Hanemann)
WTP may be much less than WTAC when few substitutes

exist for the good (i.e. WTAC is much higher).
WTP vs WTAC
Experimental evidence suggests that Loss Aversion and

Substitution effects play a part in explaining the difference.
As experience in trading in a good increases, the WTP –
WTAC difference has been shown to decline.
WTP vs. WTA
On the other side, theory says if they have property

rights, WTA should be used, and if they don’t, WTP:
u0<u1 u0>u1
CV WTP WTA
(no rights) (rights)
EV WTA WTP
(rights) (no rights)
WTP vs. WTA
Property rights re-definition by Mitchell and

Carson: always in terms of WTP.
Applicable to common/collective goods that can only be

accessed by individuals being members of the group.
Those individuals also share the maintenance costs of
the good via taxes.
What would you be willing to pay for a higher provision

of the good?
What would you be willing to pay to avoid a lower

provision of the good?
WTP vs. WTA

of the good?

u0<u1 u0>u1
CV WTP WTA
EV WTA WTP
WTP vs. WTA

of the good?

u0<u1 u0>u1
CV WTP WTA
EV WTA WTP


- WTP versus WTA

Perception of the budget constraint
Many individuals do not consider their budget

constraint and state higher WTP than that they would
have in real market.
To avoid this: ask individuals to carefully think of the

commodities they will not be able to consume if they
spend the money in their stated WTP.
NOAA says to remind individuals substitute public or

private goods exist (if public, they have to remind them
that they also contribute to their conservation via
taxes)


- WTP versus WTA

Information provided to respondents
The hypothetical market must be very similar as the

real one.
For this to be possible, it is important to provide to

individuals relevant information.
Individuals must understand all the information.
Useful to carry out pilot surveys.



- WTP versus WTA

Aggregation of the valuation
To aggregate the value, the mean/median value

derived from the change in the provision of the good is
multiplied by the number of individuals in the
population.
Mean or median (central value)?
There tends to be more concentration of low/medium

values (minimum=0)
NOAA recommends the use of the most conservative

measure: median.
Most studies use the mean as they talk about the WTP
of the ‘representative’ individual. In this sense, some
authors recommend to delete outliers.


- WTP versus WTA

About the response format…
Open-ended: “What is the highest amount that you would

pay annually for the program presented before?”
Dichotomous-choice or referendum: “Would you pay $10

for the specific change in the resource?”
Iterative-bidding
Payment card: “What is the highest amount you would pay

for the program? (Circle the highest amount that you would
choose)”
10 cent. 50 cent. $1 $5 $10 $20 $30
$50 $75 $100 $150 $200 More than $200

CVM early applications met with scepticism and
criticism:
Scott (1965): “ask a hypothetical question and you

get a hypothetical answer”
Bishop and Heberlein’s (1979) landmark validity study

on welfare estimates for goose hunting:
Actual cash transactions = CVM = Travel Cost Method

The controversy became particularly heated after the
Exxon Valdez oil spill (1989):
>> Publication of a book criticizing the fundamental

premises of CVM (Hausman, 1993)
NOAA (National Oceanic and Atmospheric Administration):
>> Blue ribbon (award, distinction) panel to evaluate the

credibility of using CVM to estimate non-use values (Arrow
et al., 1993):
-High profile economists

-Chaired by Nobel Prize laureates K. Arrow (1972) and R. Solow
(1987)
-The panel heard evidence from 22 expert economists
-Panel recommendation: “CVM surveys should be carefully
designed and controlled due to the inherent difficulties in eliciting
accurate economic values”
NOAA report concludes that CV can produce
reasonable estimates of use and non-use values so
long as stringent guidelines are followed:
- Personal interviews (rather than telephone or mail

methods)
- Referendum format (e.g. to vote on a specific tax to

protect a specified resource)
- Detailed information on the resource and on the

protection measure they are voting on, including:
>>> threats to the resource (best and worst scenarios)

>>> scientific evaluation of its ecological importance
>>> possible outcomes of protection measures
- Careful explanation:
>>> Did respondents understand that WTP was to protect a

particular resource, not the environment in general??
>>> Use of control questions
- Conservative estimates of value are preferred:
>>> WTP rather than WTA for the loss of the resource
Surveys meeting these criteria are very expensive

to operate!!
>>> Reference surveys (following all the NOAA

recommendations) could be adapted to and used in different
settings. These latter results could be compared with and
calibrated against results from reference surveys.
Most substantive contributions to the CVM:
- First CVM study by Davis (1963): big game hunting in

Maine (USA)
- Bishop and Heberlein’s (1979)’s landmark validity

study
- Mitchell and Carson (1989)’s book with

recommendations for designing a CVM study
>>> Biases in CVM studies
- First CVM study in Spain by Pere Riera (1990) to

analyse the impact of the new beltway in Barcelona
>>> Riera (1994) textbook on CVM
- NOAA presents the results and recommendations from its

blue ribbon panel on CVM (1993)
BIASES
Typology of potential response effect biases in CVM studies
Mitchell and Carson (1989):
1. Incentives to
Biases occur when respondent
misrepresent
misrepresents her true WTP
responses
Biases occur when elements of

2. Implicit the contingent market are treated by
value cues respondents as providing information
about the “correct” value of the good
Biases occur when

3. Scenario
a respondent does not respond to
misspecification
the correct contingent scenario
1. Incentives to
misrepresent
misrepresents his or her true WTP
responses
1. Incentives to
misrepresent
responses
A.Strategic bias: respondent gives a WTP that differs from his true WTP in an
attempt to influence the provision of the good and/or the respondent’s level of
payment for the good
1. Incentives to
misrepresent
responses
A.Strategic bias: respondent gives a WTP that differs from his true WTP in
an attempt to influence the provision of the good and/or the respondent’s
level of payment for the good:
- State high WTP because they know they won’t have to pay this money
and the higher the WTP, the higher the probability of the provision of the
good –which they wish.
- State low WTPs because they know they will have to pay the money and,
regardless of their response, the public good will be provided.
1. Incentives to
misrepresent
responses
A.Strategic bias: respondent gives a WTP that differs from his true WTP in
an attempt to influence the provision of the good and/or the respondent’s
level of payment for the good:
Avoid saying provision will be guaranted (to avoid undervaluation) and explain
payments will be related to the WTPs (to avoid overvaluation).
Mail surveys have higher probability of creating incentives to strategically

behave: enough time to think of the strategy.
1. Incentives to
misrepresent
responses
A.Strategic bias: respondent gives a WTP that differs from his true WTP in an
attempt to influence the provision of the good and/or the respondent’s level of
payment for the good
B. Compliance bias:
• Sponsor bias: the respondent attempts to comply with the presumed
expectations of the sponsor (or assumed sponsor)
• Interviewer bias: the respondent attempts to either please or gain status in
the eyes of a particular interviewer
1. Incentives to
misrepresent
responses
B. Compliance bias:
• Sponsor bias: the respondent attempts to comply with the presumed
expectations of the sponsor (or assumed sponsor)
It is likely individuals prefer a higher protection of nature if the survey is undertaken

by an ecologist organization. That explains why lots of surveys are carried out by
university researchers.
It is convenient survey is neutral to avoid individuals know about the sponsor. They
are usually asked a question at the end about who they think funds the study.
1. Incentives to
misrepresent
responses
B. Compliance bias:
• Interviewer bias: the respondent attempts to either please or gain status in
the eyes of a particular interviewer
It happens in personal and phone surveys. More biases when surveyors are
students rather than practitioners (important surveyor training!!).
Important to read the questions in the way they are written, follow survey
structure, etc.

value cues respondent as providing information about
the “correct” value of the good

A. Starting point bias: the elicitation method or payment vehicle introduces a

potential WTP that influences the WTP given by the respondent

A. Starting point bias: the elicitation method or payment vehicle introduces a

Normally, with iterative bidding or referendum format


A.Starting point bias: the elicitation method or payment vehicle introduces a

B.Range bias: where the elicitation method presents a range of potential WTP that
influences a respondent’s WTP
2. Implicit Biases occur when elements of

value cues the contingent market are treated by
respondent as providing information about
B. Range bias: where the elicitation method presents a range of potential WTP
that influences a respondent’s WTP
To avoid starting point bias.
If the range of values is big, it seems an open-ended format. If the range is small, it seems
a referendum question.


C.Relational bias: the description of the good presents information about its
relationship to other commodities that influences a respondent’s WTP

C. Relational bias: the description of the good presents information about its
If a natural park is to be valued, and individuals pay an entrance fee, they can
think the entrance fee is a good indicator of the value of the park and use the
fee as DAP.


D.Importance bias: the act of being interviewed, or some feature of the
instrument, suggests to the respondent that one or more levels of the amenity has
value

D. Importance bias: the act of being interviewed, or some feature of the

value
It is better not to exagerate the features of the good and be objective.
Sometimes, before the valuation question, individuals are said some people
state positive WTPs and others zero WTP.


D.Importance bias: the act of being interviewed, or some feature of the
value
E.Position bias: the position or order in which valuation questions for different
levels of a good suggests to respondents how those levels should be valued

E. Position bias: the position or order in which valuation questions for different
levels of a good suggest to respondents how those levels should be valued
Individuals can consider more important features of the good that whose value has been
asked for at the beginning of the survey.
Recommendable random ordering from survey to survey.

Biases occur when

3. Scenario
misspecification
Biases occur when

3. Scenario
misspecification
A. Theoretical misspecification bias: the scenario specified by the researcher is

incorrect in terms of economic theory or the major policy elements.
Biases occur when

3. Scenario
misspecification

B. Amenity misspecification bias: the perceived good being valued differs from
the intended good:
Biases occur when

3. Scenario
misspecification

the intended good:
Symbolic: a respondent values a symbolic entity instead of the researcher’s
intended good
Biases occur when

3. Scenario
misspecification

the intended good:
intended good. Important to say to them it is not a survey to know their opinion.
Biases occur when

3. Scenario
misspecification

the intended good:
intended good.
Part-whole: the respondent values a larger or a smaller entity (geographical part-
whole, benefit part-whole, policy-package part-whole)
Biases occur when

3. Scenario
misspecification
the intended good:
Ex. A highway wants to be valued and the individual values a highway plan to which
belongs the highway to be valued.
Ex. A set of policies wants to be valued and the individual only values that policy
directly affecting her.
It should be included a description of the ‘part’ and the ‘whole’, use graphical
resources, ask people to value the part and the whole, etc.
Biases occur when

3. Scenario
misspecification

the intended good:
intended good.
Metric: the respondent values the amenity on a different metric or scale. It happens
when the individual is not familiar with the good. Use of starting point to guide
decision.
Biases occur when

3. Scenario
misspecification

the intended good:
intended good.
Metric: the respondent values the amenity on a different metric or scale. It happens
when the individual is not familiar with the good. Use of starting point to guide
decision.
Probability of provision: the respondent values a good whose probability of
provision differs from the intended by the researcher
Biases occur when

3. Scenario
misspecification
A.Theoretical misspecification bias: the scenario specified by the researcher is

incorrect in terms of economic theory or the major policy elements
B.Amenity misspecification bias: the perceived good being valued differs from
the intended good:
• Symbolic: a respondent values a symbolic entity instead of the researcher’s
intended good
• Part-whole: the respondent values a larger or a smaller entity
(geographical part-whole, benefit part-whole, policy-package part-whole)
• Metric: the respondent values the amenity on a different metric or scale
• Probability of provision: the respondent values a good whose probability
of provision differs from the intended by the researcher
C.Context misspecification bias: the perceived context of the market (payment
vehicle, property right, method of provision, budget constraint, elicitation question,
instrument context, question order, etc.) differs from the intended context
BEHAVIOUR BEHAVIOUR

markets

o Cost of illness
o Travel cost

Contingent behaviour method:
Asks different questions related to the hypothetical

behaviour of individuals when facing new levels of Q
It would be a contingent travel cost

BEHAVIOUR BEHAVIOUR

markets

based methods like choice
o Cost of illness
o Travel cost

Attibute-based methods. Economic basis:
Lancaster (1966) introduced the idea into economics

that the value of goods or services depends upon their
attributes.

For instance the value of a car depends upon the
engine size, number of seats, color, …

The value of a day fishing depends on the expected
number of fish caught, their expected size, the cost of
reaching the fishing site, etc.
The choice experiment:
1. Identify the good or service (car, days fishing)

2. Identify attributes and determine levels
3. Develop an experimental design for profiles
4. Design questionnaire survey and incorporate
choice experiments
5. Analyze choices made and determine trade-offs
The choice experiment/Fishing trip
Characteristic Levels
Expected Catch No per 1, 2, 3, 4, 5

trip
Cost of trip $10, $50, $100
Choice 1 Choice 2 Choice 3

(stay
home)
Expected Catch 2 4 0
Number per trip
Cost $ per trip 10 100 0

Utility Model: Ui=Vi+ei
– That is the utility Ui of a choice is determined by

an observable component of utility Vi and an
error ei
Assume Vi is linear:
– Vi = b1 Catch –b2 Cost
Where do we get constant, b1 and b2?

Answer: by getting information from lots of choice set
and using a statistical method called multinomial logit
How much is one extra fish worth? If the fishers utility

function is Vi(Catch, Cost)=2Catch-4Cost
Set catch and cost equal to zero and plug it into the
utility function Vi(catch, cost) : Vi(0,0)=0;
Now increase the catch to 1: Vi(1,0)=2 that is the utility

of catching one fish equals 2
Next ask the question what would the cost have to be to

make the fisherman indifferent (just as happy) between
catching 1 fish and zero fish at zero cost?:
Vi(1,cost)=Vi(1,0.5)=Vi(0,0) Thus willing to pay a

maximum of 50 cents to catch a fish.
Case study
Contingent ranking method:
Individuals are given some cards where different environ-

mental quality levels are shown (jointly with other goods or
environmental characteristics)
After evaluating all the options, individuals have to rank all the
cards based on their preferences for Q
Researchers can analyse the preference ordering stated by

each individual to infer the economic value of Q
UNIT 5


Steps in conducting a CVM study
Most of the action in designing a CVM study occurs in the

development of the survey instrument and during data
analyses:
1. Definition of the environmental good or service of interest:
>>> Identify the change(s) in quantity or quality to be

measured: what does ‘diminishing pollution’ mean? Which will be
the consequences?  EXPLAIN THE ENVIRONMENTAL SITUATION

analyses:
1. Definition of the environmental good or service of interest
2. Design the information component of the survey (hypothetical

market)
Step 2: Design the information component of the survey

(hypothetical market)
The information provided in the survey has to represent the

hypothetical market, including:
Description of the good to be valued:

>>> quantity (e.g. 15% pollution reduction), quality, main
characteristics, etc.
>>> comparison between baseline and new condition(s)
Method of provision (the mechanism by which a policy will

be implemented):
>>> When, how and who
>>> Credible to respondents
Payment vehicle (ex.: income taxes, general increase in

prices and taxes, admission fee, bills, recreation trip cost,
donations, etc.):
>>> Balancing realism against payment-vehicle rejection
>>> Time frame: how many payments are required? One-time, each
time respondent participates, forever, annual payment for x years, etc.
Step 2: Design the information component of the survey

(hypothetical market)
The information provided in the survey has to represent the

hypothetical market, including:
Description of the good to be valued:

>>> quantity (e.g. 15% pollution reduction), quality, main
characteristics, etc.
>>> comparison between baseline and new condition(s)
Method of provision (the mechanism by which a policy will

be implemented):
>>> When, how and who
>>> Credible to respondents
Payment vehicle (ex.: income taxes, general increase in

prices and taxes, admission fee, bills, recreation trip cost,
donations, etc.):
>>> Balancing realism against payment-vehicle rejection
>>> Time frame: how many payments are required? One-time, each
time respondent participates, forever, annual payment for x years, etc.

analyses:
2. Design the information component of the survey

3. Identify whose values are to be estimated (relevant population)
4. Select a data collection mode: phone, email, face to face
5. Choose a sample size
Step 5: Choose a sample size
>>> Choose an acceptable level of precision within a given budget
>>> Most studies choose the largest sample size possible
Sample size with a random sample procedure:
0,25N
n
 N - 1s p2ˆx + 0,25
n = sample size
N = size of the population
= population variance determined by the confidence

s 2
ˆp x
interval (i.e. 95%) and the sample error (i.e. ±3%)

analyses:

4. Select a data collection mode
6. Questionnaire design (including CVM and auxiliary questions)

Step 6: Design of the questionnaire
The questionnaire has to follow this structure:
Introduction: presentation of the study, etc.
Valuation section (hypothetical market), including

information about:
- the good (quantity and quality) being valued

- the provision
- the payment vehicle
- the valuation format
- etc.
Socioeconomic section: age, level of income,

educational background, place of birth and residence,
etc.

analyses:

4. Select a data collection mode
6. Questionnaire design (including CVM and auxiliary questions)

7. Pre-test and implementation of the survey
8. Data analysis and model estimation
9. Prepare the report and present results
CVM CASE STUDY
Atlantic Islands of Galicia National Park
Parque Nacional Marítimo-Terrestre das Islas Atlánticas de Galicia
Atlantic Islands of Galicia National Park (2002)
Parque Nacional Marítimo-Terrestre das Islas Atlánticas
de Galicia
The Cíes Islands are an archipelago off the coast of
Pontevedra in Galicia (Spain)
Questionnaire for visitors of the park
Introduction and presentation of the study…

Questions 1-23: introduction, information about the services

available in the park, travel cost data, etc.
Questions 1-23: introduction, information about the services

available in the park, travel cost data, etc.
Parque Nacional Marítimo-Terrestre das Islas Atlánticas de
Galicia
Questions 24-32: valuation questions

CURRENT SITUATION
Guillemot
22,000 1000
Cliff seagulls cormorants
Clean
water Dunes
Beaches
Islas Cies - current situation (question 26)
The management of Islas Cies by the government allows

society to enjoy the National Park as it is today. This
management includes setting rules of use as well as
implementing costly activities such as: monitoring,
protected wildlife conservation, fire prevention/fighting,
sewage purification, waste collection, water services and
cleaning.
Suppose the government can no longer fund increasing

costs of National Parks…
HYPOTHETICAL SCENARIO - NO FUNDING
Guillemot
11,000 300
Cliff seagulls cormorants
Dirty water
Dunes
Buildings
Islas Cies – hypothetical situation (question 26)
To guarantee the current situation: would you have paid

(beyond the current transportation cost) a daily entrance
fee of €__ to access the park taking into account that
this money would not have been available for other
issues?
Islas Cies – Protest bids or protest answers
a. I would pay but a lower quantity

b. I cannot afford to pay more for my trip to Islas Cies
c. I distrust the use of the money
d. The park does not have any value for me, so I do not
care about its deterioration
e. Access to the park should be free
f. I do not believe the public administration is going to
give up funding the park
g. I don’t know
Some results: distribution of answers
Results…
To estimate the willingness to pay of individuals, based on

their answers, we should use a logistic model where the
dependent variable is binary (0 / 1).
This model examines the influence that the amount to be

paid, the bid (300, 600, 900, 1200, 1500, etc..), has on
the answer of the individual (yes / no).
Regressing this model on the data, we can see that:
The average WTP of the sample is pta. 2,245 (€13.49)
The confidence interval at the 95% is pta. 1,974-2,624

(€11.86-€15.77)
Bibliography
Azqueta, D. (1994). Valoración económica de la calidad ambiental.

Madrid: McGraw-Hill.
Azqueta, D. (2002). Introducción a la economía ambiental. Madrid:

McGraw-Hill.
Carpintero, Ó. (1999). Entre la economía y la naturaleza. Los Libros

de la Catarata, Madrid.
Champ, P.A.; Boyle, K.J.; Hanley, N.; Barbier, E. (2009). Pricing

nature. Cost-Benefit Analysis and Environmental Policy.
Cheltehnham: Edward Elgar.
Hanley, N, Shogren, J.F. and White, B. (2007). Environmental

Economics. In theory and practice. New York: Palgrave McMillan.
Labandeira, X., León, C.J. and Vázquez, M.X. (2007). Economía

ambiental. Madrid: Pearson Educación, SA.
Bibliography
Mitchell, R.C. and Carson, R.T. (1989). Using surveys to value public
goods: the contingent valuation method. Washington: Resources for
the Future.
Perman, R; Ma, Y., McGilvray, J. and Common, M. (2003). Natural

resource and environmental economics. Harlow, England: Pearson
Education Limited.
Riera, P.; García, D.; Kriström, B.; and Brännlund, R. (2005).

Manual de economía ambiental y de los recursos naturales. Madrid:
Thompson Editores
Torres, C. and Hanley, N. (2016). Economic valuation of coastal and

marine ecosystem services in the 21st century. An overview from a
management perspective (available at
https://dea.uib.eu/digitalAssets/366/366392_w75.pdf)
Vatn, A. (2005). Institutions and the environment. Cheltenham:

Edward Elgar Publishing, Inc.

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UNIT 5

The economic valuation methods

(20521) Environmental Economics in Tourist Areas

The economic valuation methods

(20521) Environmental Economics in Tourist Areas

Marketed good: we observe its price (we can estimate its

Marketed good: we observe its price (we can estimate its

Marketed good: we observe its price (we can estimate its

Can we measure the value of an un-priced ‘negative good’ (a

Example: air pollution

Example: a natural park

Marketed good: we observe its price (we can estimate its

Can we measure the value of an un-priced ‘negative good’ (a

Example: air pollution

Example: a natural park

We will use two dimensions:

How data are collected:

Is the valuation method using real data (i.e. basing on

We will use two dimensions:

How data are collected:

Is the valuation method using real data (i.e. basing on

We will use two dimensions:

How data are collected:

Is the valuation method using real data (i.e. basing on

The type of monetary valuation:

Are monetary values directly obtained or indirectly

We will use two dimensions:

How data are collected:

Is the valuation method using real data (i.e. basing on

The type of monetary valuation:

Are monetary values directly obtained or indirectly

DIRECT • Simulated or experimental

• Production function approaches

o Hedonic pricing (property

What are the main ways in which non-market values

The two main types of approach are:

 Stated preference: directly asking people about

DIRECT • Simulated or experimental

• Production function approaches

o Hedonic pricing (property

What are the main ways in which non-market values

The two main types of approach are:

 Stated preference: directly asking people about

 Revealed preference: inferring environmental

DIRECT • Simulated or experimental

• Production function approaches

o Hedonic pricing (property

SP and RP approaches look for the direct, utility impact of

Note there are also “indirect” valuation approaches, such

DIRECT • Simulated or experimental

o Hedonic pricing (property

Model the behaviour of producers and their response to

Also called “valuing the environment as input”:

>> Assumption: Q is a factor input into the production

>> Changes in the availability of Q can affect the costs

Dose-response and change-in-productivity models can

Which method should be used??

The purpose of the valuation.

The relationship among the variables entering the utility

The economic valuation methods

(20521) Environmental Economics in Tourist Areas

DIRECT • Simulated or experimental

• Production function approaches