Valuation 6: CVM continued

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Valuation 6 CVM continued

• Valuation of non-use values
• The Exxon Valdez oil spill
• An application to waterfowl
• Embedding and possible causes
• Warm-glow and its effect on donations to public
  goods
• The NOAA guidelines
• The EU environmental liability directive

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Last week we looked at

• Direct and indirect valuation methods
• Total economic value revised
• The contingent valuation method, and its many
  potential biases
• Among them the part-whole/embedding problem -
  suggesting that people do not answer what it is
  being asked

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WTP for conservation of the Apollo (Parnassius
apollo)

• Found on mountains in
• Europe usually above
• 1000m up to 2000m
• On the IUCN Red List of threatened species
• Due to changes/degradation of their habitat with
  less food available for the caterpillars

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WTP for the Apollo (2)

• Suppose a fund is set up to pay for a perpetual
  conservation of this species
• Every hectare of protected land has a probability
  of 30 that the species will survive there over
  the next 50 years
• A hectare of protected land costs EUR 1000 to
  purchase and EUR 50 per year to manage the
  conservation
• What are you willing to pay per year to donate to
  the fund?

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WTP for conservation

• What about all the other endangered species
  including mammals, birds, insects etc.?
• The 2004 IUCN Red List contains 15,589 species
  threatened with extinction
• Focusing on a number of flagship species might
  translate into funding for their natural habitat
  and provide much broader conservation benefits
• E.g. giant panda, elephant, lion, tiger
• Otherwise, society might be willing to support a
  flagship species alone

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Ex-ante and ex-post measurements of non-use
values

• The ex-ante use of preference based values for
  the determination of benefits is valuable for
  policy makers
• Is it equally valuable to use this method ex-post
  for the measurement of damages?

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The Exxon Valdez oil spill

• The oil tanker departed the Valdez oil terminal,
  Alaska on March 23, 1989 with 53 mio. gallons of
  crude oil
• The ship manoeuvred out of the shipping lane to
  avoid icebergs but failed to return to the lanes
  and struck a reef
• The accident resulted in a discharge of about 11
  mio. gallons of oil into Prince William Sound

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Exxon Valdez oil spill (2)

• Environmental Impact
• Thousands of animals died
• Due to thorough cleanup little visual evidence
  but reductions in some animal populations can
  still be observed
• Litigation
• The damage was estimated to lie between US3 and
  15 billion
• Exxon settled for US 1 billion in natural
  resource damages and restitution for injuries
• In addition, Exxon spent over US 2 billion on
  oil spill response and restoration

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Waterfowl - Survey

• Study Bill Desvouges and colleagues, 1993
• Context Exxon Valdez oil spill
• Funding Exxon Corp.
• Mall survey, developed using focus groups,
  one-on-one pretests, and two mall pretests
• Two shopping malls in Atlanta, Georgia, outside
  the Central Flyway
• 10-12 minutes
• 1205 completed questionnaires

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Waterfowl Survey -2

• Q1 How often in the past 6 months have you heard
  about issues involving migratory waterfowl
• (select number 1 (none) 5(seven or more
  times))
• Q2 Is protecting waterfowl important to you
• (if yes select reasons)
• Show way of Central Flyway second highest number
  of migratory waterfowl, 8.5 million a year
• Q3 How would you rate your knowledge (low, mid,
  high) of threats to the waterfowl in the central
  flyway (oil spills, waste oil holding ponds,
  wetlands destruction, herbicides and pesticides)

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Waterfowl Survey -3

• Describe waste-oil holding ponds
• In 1989, N ducks died there. This is x of the
  8.5 million migratory waterfowl
• Ponds could be covered by nets, Federal
  Government considers this, Fish and Wildlife
  Service would monitor and enforce
• Q4 Think about your income, expenses,
  alternatives. What is the most that your
  household would agree to pay each year in higher
  prices for wire-net covers to prevent about N
  migratory waterfowl from dying each year in
  waste-oil holding ponds in the Central Flyway?

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Waterfowl Survey -4

• Q5 Is the amount greater than zero. If yes,
  select most important reason
• Q6 If no, select most important reason
• Q7 Indicate agreement to statements
• Q8 Ditto for waterfowl
• Q9 Activities
• Q10 Age Q11 Education Q12 Sex Q13 Race Q14
  Income Q15 Household size Q16 Membership

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Waterfowl Results

• 398 answered for N2,000 408 for N20,000 399
  for N200,000
• Excluded 29 as outliers (3), protest bids
  (8), unlikely (1) and rubbish (17)
• WTP (2,000) 59 ? 16 /household/year
• WTP (20,000) 59 ? 10 /household/year
• WTP (200,000) 71 ? 15 /household/year
• Not significantly different!

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Waterfowl Reasons

• Desvousges et al. we find that CV yields
  estimates that fail to meet several basic
  criteria for accuracy
• Diamond and Hausman responses to CV questions
  are not consistent with the basic economic theory
  of choice
• Is some number better than no number?
• People cannot count
• People do not listen
• People realised that 2,000 or 200,000 ducks is
  small compared to 8.5 million
• Embedding and warm glow

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Embedding

• WTP for same good varies depending on whether it
  is assessed on its one or embedded as part of a
  more inclusive package
• Kahnemann (1986)
• increased taxes to prevent drop in fish
  population in all Ontario lakes/smaller area
• scope effect
• sub-additivity effect
• Possible explanations
• Substitution and satiation
• Purchase of moral satisfaction

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Some Puzzles

• In a large economy, no one should contribute to
  public goods like the Red Cross, the Salvation
  Army, Greenpeace yet they do
• Government support should crowd out charitable
  donations but it does not
• This suggests that people donate to public goods
  for other reasons than pure altruism social
  pressure, guilt, sympathy or warm glow may
  explain this

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Warm Glow

• Consider
• For a given wealth wi the agent derives utility
  from private consumption xi, from donating gi and
  from the public good G
• Notice that gi enters the function twice
• Three cases
• Purely altruistic
• Purely egoistic
• Impurely altruistic

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Warm Glow (2)

• can be rewritten as
• The maximisation problem is then equivalent to
• Differentiating with respect to G and solving
  yields

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Warm Glow (3)

• The donations function
• The marginal propensity to donate is
• The marginal propensity to donate for altruistic
  reasons is
• The marginal propensity to donate for egoistic
  reasons is

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Warm Glow (4)

• The marginal propensity to donate is
• What is the sign of fie?
• If we cut G-i by 1 and increase wi by 1 the
  first argument of fi() remains unchanged
• As wixigi the actor would spend some money on
  xi and some on G so that G would fall
• If we cut wi by a tax of 1 and increase G-i by
  1 G would increase
• Warm glow leads to higher donations
• Warm glow leads to embedding

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NOAA guidelines from 1993

• A panel of experts provided advice to the
  National Oceanic and Atmospheric Administration
  on the question
• is the CVM capable of providing estimates of
  lost non-use or existence values that are
  reliable enough to be used in the natural damage
  assessment?
• Conclusion Yes, if
• The six most important guideline CV experiments
  should
• rely on face-to-face interviews
• elicit the respondents WTP rather than WTA
• use dichotomous choice referendum elicitation
  format
• contain an accurate and understandable
  description of the programme or policy
• include reminders of the substitutes for the
  commodity in question
• include a follow-up section at the end to be sure
  the if the respondent understood the choice

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Environmental Liability in the EU

• There is very limited provision for assessment of
  environmental damage
• Most legislation in member states uses
  traditional legal forms rather than
  environmental damages per se
• Personal injury or property damage
• The EU Environmental Liability Directive fills
  this legislative gap and broadens the notion of
  damages to cover direct or indirect damage to the
  aquatic environment, to species and natural
  habitat or contamination of the land
• Deadline for transposition in the Member States
  was 30.4.2007

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The EU Environmental Liability Directive

• In addition to primary remedial measures
• The use of resource-to-resource or
  service-to-service equivalence approaches shall
  be considered first
• Provide natural resources and/or services of the
  same type, quality and quantity
• Where this is not possible, alternative resource
  and/or services shall be provided (reduction in
  quality can be offset by increase in quantity)
• If this is not possible, alternative valuation
  techniques shall be used
• The authority prescribes the method

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Implications

• Applied at reasonable cost?
• Who should be counted as part of the affected
  population?
• Summing over population can produce enormous
  estimates
• Sufficiently accurate for use in court?
• Small errors can make significant differences
• Contingent valuation studies are easy to do, but
  hard to do really well