Transcript EXISTENCE VALUE Purpose: To define existence value (as a benefit category) and discuss the theoretical and empirical problems analysts face in using it.

EXISTENCE VALUE
Purpose: To define existence value (as
a benefit category) and discuss the
theoretical and empirical problems
analysts face in using it
ACTIVE AND PASSIVE USE
VALUES
Active use – person makes some use of
the object in question (hiking in the
wilderness).
Passive use or non-use – person values
good not actively used (thinking about
existence of wilderness).
Non-use value – people are willing to pay
even though they don’t use it.
Active use benefit categories:
Exhaustible consumption goods: value is
easily determined through markets.
Direct consumption of toll goods:
consumption is on site and can usually
be observed.
Indirect consumption of toll goods:
consumption is offsite (a book or movie
about something) and also may be
observable.
Passive use benefit categories:
Option value: value to keep open the
possibility of use in the future.
Pure existence value: good has intrinsic
value apart from its use.
Altruistic existence value: driven by
desire of others to consume the good.
Bequest value: altruism is directed
toward future generations.
CONTINGENT VALUATION:
MEASURING EXISTENCE VALUE
Survey (market) research (SRS) to get
people to express their WTP based on
all their possible motivations for valuing
policy changes.
This approach depends on the analyst’s
ability to frame correct questions, and
requires the analyst to convey a full
description of the policy in question.
Altruistic existence values
Pose special problems.
An individual’s own consumption, cost
and benefits can be estimated
separately and then added together to
obtain net benefits.
Altruistic values, however, may depend
on the distribution of costs and benefits:
who will use the good and who bears
cost of maintaining it?
Instrument Design 1
SRS representing everyone with standing
As WTP of use and non-use values are
sensitive to the order in which they are valued,
use values should be discovered before nonuse values, or else non-use will be
overestimated.
Non-use values are also sensitive to geographic
areas (i.e., higher existence values for assets in
close proximity). The extrapolation of samples
over a large geographic area is controversial.
Instrument Design 2
•
If respondents are informed of all
sources of uncertainty relevant to the
valuation of the policy change, then
WTP becomes an option price. Ergo, no
adjustment for uncertainty is required..
Example: Mono Lake
The State of California Water Resources
Control Board had to decide how much
water to allocate to Los Angeles from
sources flowing into Mono Lake. The
reduced water flows to the lake were
affecting food supplies for nesting and
migratory birds.
Mono Lake
Preliminary Survey
California households were asked in a mail survey, whether they would
pay more on their water bill for higher cost replacement water
supplies, so that natural flows could once again go into Mono Lake.
They were told that, according to biologists, the higher flows to the
lake were needed to maintain food supplies for nesting and migratory
birds.
The average willingness to pay per household was estimated to be $13
per month, or $156 per year. When multiplied by the number of
households in California, the total benefits exceeded the $26 million
cost of replacing the water supply by a factor of 50. One impact of the
survey results was to change the nature of the debate over Mono Lake
from "fish or people" to one that recognized that people care about fish
and birds, as well as about inexpensive water supplies for Los
Angeles.
Follow-up Survey
This new survey was conducted over the
telephone, with people who had been mailed
information booklets with maps and photosimulations showing what the lake would look
like at alternative water levels. It also gave
detailed information about effects of changing
lake levels on different bird species. Survey
respondents were asked how they would vote
in a hypothetical referendum regarding Mono
Lake.
Results
Survey showed that the benefits of a
moderately high (but not the highest) lake
level were greater than the costs.
The California Water Resources Control Board
did reduce Los Angeles’ water rights by half,
from 100,000 acre feet to about 50,000 acre
feet, to allow more flows into Mono Lake.
Example: Salmon recovery
The Elwha and Glines dams on the Elwha River on the
Olympic Peninsula in Washington are very old and
have no fish ladders. They block migration of fish to
70 miles of pristine spawning grounds in Olympic
National Park.
It is estimated that their removal would more than triple
salmon populations on the Elwha River.
However, the cost to remove the dams and the 50
years of sediment build-up behind them was
estimated to be in the neighborhood of $100-$125
million.
Application
Households in Washington and
elsewhere were asked if they would
vote in favor of removing the dams and
restoring the river, in order to triple
salmon populations at an annual cost
that varied across households.
Results
The estimated economic values per household
ranged from $73 for Washington households to $68
for the rest of the U.S. households. Using these
results, the economic value to Washington residents
alone would justify removing the dams and restoring
the river. If one applied the average willingness to
pay per household to the remaining 86 million
households in the rest of the U.S., net benefits were
in excess of $1 billion
Elwha Dam removal
Cost-Benefit Analyses of
Spotted Owl Protection
Hagen, Vincent, & Welle:
total costs and CV benefits
Rubin, Helfand, & Loomis:
total costs and CV benefits
Montgomery, Brown, & Adams:
marginal costs
Benefit: Average Annual Willingness to Pay (WTP)
Contingent Valuation Method
Hagen, Vincent, & Welle
High
Medium
Low
Per household
$144.28
86.32
47.93
Number of households Total WTP
(millions)
(millions $)
96
$13,850.88
96
8,286.72
96
4,601.28
Rubin, Helfand, & Loomis
WA
OR
CA
Rest of US
Number of households Total WTP
Per household
(millions)
(millions $)
$34.84
1.801
62.75
34.84
1.085
37.80
-10%
31.36
10.722
336.20
-29%
24.74
75.871
1,876.78
Total US
89.479
2,313.52
Montgomery, Brown and Adams
1. Probability of owl survival as function of time, population, and habitat.
2. Reduction of annual supply as function of habitat protection.
3. Economic surplus lost as a function of supply reduction
using Timber Assessment Market Model.
In millions of dollars, PV over 50 years
Strategy:
ISC conservation strategy on public land and
restriction of harvest in critical habitat
ISC conservation strategy on public land
USDI Recovery Plan
Probability of
survival
Marginal Cost
0.95
0.91
0.82
3,800.00
1,400.00
600.00
Total Cost
46,000.00
33,000.00
21,000.00
Final Cost-Benefit Models
In millions dollars
Montgomery
Total Cost
Expected Benefit
TB x p(S)
Net Benefit
Comparing to the CV study of Rubin (TB=$38,106)
Probability: 95%
Probability: 91%
Probability: 82%
46,000.00
33,000.00
21,000.00
30,215.70
28,943.46
26,080.92
(15,784.30)
(4,056.54)
5,080.92
93,903.70
89,949.86
81,053.72
47,903.70
56,949.86
60,053.72
Comparing to the CV study of Hagen (TB=$98,846)
Probability: 95%
Probability: 91%
Probability: 82%
46,000.00
33,000.00
21,000.00
SHOULD EXISTENCE VALUE BE
INCLUDED IN CBA?
Existence values for unique and long-lived
assets should be estimated whenever
possible. When existence values can’t be
measured, the analyst should discuss their
possible significance on the sign of net
benefits.
Costs and benefits should be presented
with and without their inclusion to make
clear how they affect net benefits.
Some Difficulties with Contingent Valuation
Sample size and selection bias
Self-reporting and strategic bias
Question specification bias (“priming”)
Embedding or part-whole bias
Does $27 + $48 = $75 ? --Probably not!
Interpreting nonresponse and protest answers
Arrow-Solow Panel Recommendations
(1993)
1. Personal interviews are preferred.
2. Ask WTP to prevent future incident rather than WTA
for damages from incident that already occurred.
3. Use referendum format.
4. Begin with a scenario.
5. Remind people that a WTP would reduce the money
they have available to spend on other things.
6. Remind people of substitutes for the commodity in
question.
7. Include follow-up questions to verify understanding.