Lecture 13

.title[
# Lecture 13
]
.subtitle[
## Contingent valuation method
]
.author[
### Ivan Rudik
]
.date[
### AEM 4510
]

---

``` r
if (!require("pacman")) install.packages("pacman")
```

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## Loading required package: pacman
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``` r
pacman::p_load(
  tidyverse, xaringanExtra, rlang, patchwork, nycflights13, broom, viridis, vembedr
)
set.seed(1)
options(htmltools.dir.version = FALSE)
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})
red_pink <- "#e64173"
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# A blank theme for ggplot
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---

# Roadmap

- How do stated preference methods differ from revealed preference methods?
- How do we do contingent valuation?

---

# Stated vs revealed preference

---

# Revealed preference methods

The two method's we've learned so far are called .hi[revealed preference methods]

This is because people's preferences or valuations are *revealed* through their own private actions

Hedonics: purchasing of houses of different attributes and costs

Travel cost: visits to sites of different attributes and costs

We then used our economic theory to show how we could use the market prices/costs to reveal people's valuation for non-market goods

---

# Stated preference methods

The other way we could do this is with .hi[stated preference methods]

Stated preference methods derive people's valuations from responses to hypothetical choices they make in surveys

This particular approach is called .hi[contingent valuation]: a survey-based method for eliciting total economic values, usually WTP, that people place on goods, services, and amenities

---

# Contingent valuation method (CVM)

Here's some basic facts about CVM:

- A highly-structured survey is administered to consumers/citizens to determine value they place on change in amenity or service

- Draws on psychology as well as economics

- Only valuation methods that can be used to estimate non-use value (although studies elicit total value; if non-users, we have non-use value)

- Very time-consuming and expensive if well done

---

# Contingent valuation method (CVM)

CVM has had a lot of impact on policy:

- Executive and legislative: regulatory impact analysis (RIAs)
- Judicial: private litigation, government litigation
---

# CVM history

1963: Robert Davis values changes in Maine recreational areas in Harvard PhD dissertation

1967: Concept of non-use value introduced by Krutilla (Conservation Reconsidered)

1980 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA):  Federal and state agencies were regarded as resource trustees that could recover appropriate damages from “potentially responsible parties.” In order to sue, must compute monetary equivalent of damages

1986: Non-use values recognized as a property right of U.S. citizens (Ohio v. U.S. Dept of Interior) – must be measurable

---

# CVM history

1989: Exxon Valdez oil spill — non-use value losses estimated by CV method to exceed $2.2 billion; Exxon launches research & campaign to discredit CV

---

# CVM history

1992: NOAA Panel rules that results from CV studies were valid and sufficiently reliable for use in litigation (as “starting point”); also offers guidelines for future use

.center[



]

---

# CVM applications

Damages from Exxon Valez oil spill

Damages from Deepwater Horizon oil spill

Benefits from visibility improvements at the Grand Canyon

Benefits from improving water quality

---

# How do we conduct a CVM study?

- Clearly identify the good/service and the (policy-induced) change in the good/service to be valued — oil spill on beach (what’s valued? A day at the beach; a view of the beach, a degraded beach, water pollution?)
--

- Identify whose values are to be estimated: geographical scope of “market” through focus group and pretest
--

- Design information component of the survey instrument. Describe item to be valued, payment vehicle (tax, user fee, product prices)

---

# How do we conduct a CVM study?

- Select a data collection mode: in person, mail, phone; and choose statistical sampling design
--

- Administer survey to a random sample of the market
--

- Conduct statistical analyses, do validity test, use elicited WTP for policy analysis

---

# CVM components

.hi[Collect information] on consumer’s past, present, and expected future use of good, demographics, etc

---

# CVM elicitation

There's a lot of options, some are better than others

.hi[Ask for WTP (open-ended)] – unfamiliar, few real markets in which we’re asked to generate our reservation price 
  - "What is your max you would pay to create four self-sustaining wolf packs in four remote areas of Colorado?" This type of question is called "open-ended" CVM

---

# CVM elicitation

.hi[Bidding Game] – start with a WTP number, ask for yes-no response, then increase/decrease until indifference (Problem: starting-point bias)
  - I ask, "Would you pay 1 dollar to create four self-sustaining wolf packs in four remote areas of Colorado?" If you say "yes", I can ask about 2 dollars. If you say yes to 2 dollars, then I ask a larger amount, etc. Questions stop when you say no. Can also play this game starting with a large amount and work down.
  
---

# CVM elicitation

.hi[Payment Card] – present a card with a set of possible payments, respondent circles largest value they would pay
  - On the following payment card (a card with a bunch of different $ amounts) circle the largest amount you would be willing to pay to create four self-sustaining wolf packs in four remote areas of Colorado. This is a payment-card question

---

# CVM elicitation

.hi[Referendum (Discrete Choice)] – start with different baseline WTP number for each respondent, get yes or no; stop. Minimizes bias, recommended by NOAA. Problem: requires more data, and so more costly
  - "Creating four self-sustaining wolf packs in four remote areas of Colorado will increase your state taxes by 10 dollars a year for five years. Would you vote for such a proposal?" This is a "referendum CVM" question, dollar amounts vary across respondents)

---

# CVM elicitation media

.hi[Mail survey:] cheapest; but systematic non-responses big problem; difficult to control flow of information

.hi[Phone survey:] cheap; but selection bias (autodialing does not access cell phones); self-selection bias among those willing/available; no visual cues can be used

.hi[In-person survey:] expensive, but reliable; recommended by NOAA Panel; problems: interviewer bias? socially-correct responses?

---

# Potential CVM problems

.hi[Hypothetical Markets:] We are asking people to value something in  a market that isn’t real, answers might not reflect real preferences
  - "warm glow"
  - Protest zeros
  - Hypothetical bias: a tendency to overstate values (especially in terms of WTA instead of WTP) when no money is actually at stake
  
We try to address this with .hi-blue[entreaties:] scripts read before a stated preference survey to try to  induce the respondent to not give a biased response
  - Reminds respondents to consider budget constraint
  - "Cheap talk" - explicit discussion of hypothetical bias

---

# Cheap talk (Cummings and Taylor, 1999)

> ... in a recent study, several different groups of people voted on a  referendum just like the one you are about to vote on.	Payment  was hypothetical for these groups, as it will be for you.	No one  had to pay money if the referendum passed.	The results of  these studies were that on average, across the groups, 38  percent of them voted "yes".	With another set of groups with  similar people voting on the same referendum as you will vote on  here, but where payment was real and people really did have to  pay money if the referendum passed, the results on average  across the groups were that 25 percent voted yes.	That's quite a  difference, isn't it?

---

# Cheap talk (Cummings and Taylor, 1999)

This difference between hypothetical outcomes and real stakes outcomes is called .hi[hypothetical bias]

> How can we get people to think about their vote in a hypothetical  referendum like they think in a real referendum, where if enough people  vote "yes," they'll really have to pay money?	How do we get them to  think about what it means to really dig into their pocket and pay money,  if in fact they really aren't going to have to do it?

---

# Cheap talk (Cummings and Taylor, 1999)

> Let me tell you why I think that we continually see this hypothetical  bias, why people behave differently in a hypothetical referendum than  they do when the referendum is real.	I think that when we hear about a  referendum that involves doing something that is basically good –  helping people in need, improving environmental quality, or anything  else – our basic reaction in a hypothetical situation is to think: sure, I  would do this.	I really would vote "yes" to spend the money....

---

# Cheap talk (Cummings and Taylor, 1999)

> But when the referendum is real, and we would actually have to spend our  money if it passes, we think a different way.	We basically still would like to  see good things happen, but when we are faced with the possibility of  having to spend money, we think about our options: if I spend money on  this, that's money I don't have to spend on other things... we vote in a way  that takes into account the limited amount of money we have....	This is just  my opinion, of course, but it's what I think may be going on in hypothetical  referenda.

---

# Cheap talk (Cummings and Taylor, 1999)

> So if I were in your shoes…	I would ask myself: if this were a real  referendum, and I had to pay $10.00 if the referendum passed: do I really  want to spend my money this way? If I really did, I would vote yes; if I  didn't, I would vote no....

> In any case, I ask you to vote just exactly as you would vote if you were  really going to face the consequences of your vote: which is to pay money  if the proposition passes. Please keep this in mind in our referendum.

---

# "Cheap talk" referendum question

> “Everyone here in the room will contribute $10.00 to the Georgia  Chapter of the Nature Conservancy.	The contribution is to be used for  the purpose of purchasing additional lands in the state of Georgia to be  protected and held in stewardship by the Nature Conservancy.”

---

# "Cheap talk" referendum question

Ask this question to three groups:
  - real referendum
  - hypothetical referendum
  - hypothetical referendum with cheap talk

---

# Potential CVM problems

.hi[Incentives to Strategically Misrepresent:] Related to hypothetical bias, respondents may misrepresent their  preferences in order to influence the outcome
--

- Believe they won’t have to pay but believe their answer  matters for passage `$\rightarrow$` overstate
--

- Believe that they will have to pay but also believe that their answer does not matter for passage `$\rightarrow$` understate

We need to make the respondent believe their answer matters for passage (i.e., it's "pivotal") and that they will have to pay what they say (no free riding)

---

# Potential CVM problems

.hi[Information Problems:] How can the interviewer provide enough information for the  respondent to be able to form preferences without creating  existence value where there had been none?

.hi[Value Cues:] Does the way that the question is asked suggest a correct answer to the respondent (e.g., starting-point bias, yea-saying bias)

---

# CVM example: Improvements in the Adirondacks

Major air quality initiatives have cited reduced acid precipitation as a benefit of further reductions in sulfur dioxide (SO2) and nitrogen dioxides (NOx)
 - 1990 Clean Air Act Amendments
- 2005 Clean Air Interstate Rule
- 2004 Clear Skies Proposal

Programs are costly: clear skies cost 4.3 bil. (2010) rising to 6.3 bil. (2020)
- Aggregated benefits estimated to be 336 million to 1.1 billion (accounting for statistical uncertainties these estimates could halve or double)

---

# CVM example: Improvements in the Adirondacks

.pull-right[
The survey introduces an intervention where New York State would run a tax-financed program to drop lime from airplanes onto lakes and affected forests to neutralize the acidity

This was a necessary ruse that was accepted by respondents

]

---

# Summary of the science

Adirondack Park covers 20% of NY State: .hi-red[three times the area of Yellowstone National Park]

1/6 of the park is designated as "wilderness", 85% of all wilderness area in the northeast

Adirondack Park has:
  - 6 major river basins, 3000 lakes
  - Largest set of old growth forests in the east
  - 33 tree species, lots of native plants
  - 9 million visitors

---

# Summary of the science

In 1984: 19% of lakes chronically acidic

Depending on chemical thresholds under the 1990 CAAA, this could fall to 11% by 2040 or rise to 43 percent

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# Summary of the science

---

# ADK map

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# Eliciting WTP

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# Eliciting WTP

> If the majority of voters support this program, your household's share of its cost would be $250 [$900, $1500, $2500] in total, or $25 [$90, $150, $250] per year, paid as an additional tax over the next ten years

> If a vote were held today, would you vote For the program or Against it? [ Yes / no ] (Circle one answer)

---

# WTP for base scenario

---

# Average WTP by region

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# WTP estimates

Depending on improvement scenario and estimation method, estimated median WTP ranged from 48 to 159 dollars per household per year

Aggregated across 7 million residents in NY state and using a range of discount rates, estimate aggregate annualized benefits of 336 million to 1.1 billion dollars

---

# Test for validity

.pull-left[
WTP increased with:
- Income
- Personal stake (e.g. frequency of visits)
- Proximity
- Self-stated environmentalist, liberal, etc
]

---

# Exxon Valdez (1989)

The Exxon Valdez oil spill occurred in Prince William Sound, Alaska, March 24, 1989

*Exxon Valdez*, an oil tanker, struck Prince William Sound's Bligh Reef 1.5 mi west of Tatitlek, Alaska

It spilled 10.8 million US gallons of crude oil over the next few days

Considered to be one of the worst human-caused environmental disasters

Second largest spill after 2010 Deepwater Horizon

---

# Exxon Valdez (1989)

Exxon spent $2 billion on cleaning up the efforts

In *Exxon v. Baker*, an Anchorage jury awarded $287 million for actual damages and $5 billion for punitive damages

The punitive damages were reduced to $507.5 million after multiple appeals including the last one to the Supreme court

---

# CVM and Exxon Valdez

.pull-left[
“Contingent Valuation and  Lost Passive Use: Damages  from the Exxon Valdez” by Richard T. Carson, Robert
C. Mitchell, W. Michael  Hanemann, Raymond J.  Kopp, Stanley Presser, and  Paul A. Ruud

We will look at their survey instrument to see how "best practices" are followed
]

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# CVM and Exxon Valdez: background

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# CVM and Exxon Valdez: background

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# CVM and Exxon Valdez: background

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# CVM and Exxon Valdez: background

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# CVM and Exxon Valdez: wildlife

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# CVM and Exxon Valdez: wildlife

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# CVM and Exxon Valdez: spill

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# CVM and Exxon Valdez: spill

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# CVM and Exxon Valdez: spill

.center[
<img src="files/13-exxon10a.png" width="60%" />
<img src="files/13-exxon10b.png" width="60%" />
]

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# CVM and Exxon Valdez: clean up

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# CVM and Exxon Valdez: wildlife consequences

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# CVM and Exxon Valdez: wildlife consequences

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# CVM and Exxon Valdez: hypothetical market

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# CVM and Exxon Valdez: hypothetical market

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# CVM and Exxon Valdez: hypothetical market

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# CVM and Exxon Valdez: hypothetical market

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# CVM and Exxon Valdez: hypothetical market

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# CVM and Exxon Valdez: hypothetical market

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