Stated Preference &
Methods for measuring non-market
Constructed market approaches
Designing a CVM survey
Conducting an experiment
Recall revealed preference
Remember, our first choice is always
to use “revealed preference”
approaches to value environmental
What if value (or part of value) can’t
be captured within an existing
Answer: use “constructed market”
What are constructed market
Stated preference methods
More generally known as “Contingent
Valuation Methods” (CVM)
• Ask people: “How much is the environmental good
worth to you?”
Typical goal: learn how people think about
Two types of experiments
The value of the Channel Islands marine reserve?
Do people value the organisms or the reserve?
Should DDT plume off of Rancho Palos Verde be
cleaned up with state funds?
How large are the wildlife damages from Exxon
The value of restoring steelhead to Ventura River?
The environmental damage from drilling in ANWR?
How elicit “willingness to
No market exists within which to
Many challenges to do a credible job
Need to design survey to minimize
opportunities for bias of results.
Value of solar-generated
Explain purpose of survey and how long it will take,
importance of truthful answers
Solar as “green” electricity
Compare to “brown” electricity
Importance of air quality, current opinion about air quality
Have you participated in green markets?
Eliciting value of green electricity
Concept of Renewable Energy Credit (REC)
Would your purchase a REC for $X? (vary X)
Gender, Age, Race, Income, Greenness
Example – Seoul CVM Survey
Introduction – explain purpose of survey and time to complete (30 min)
Request background attitudes and info
What is your opinion about current tap water in Seoul? (very good, good, etc)
In the last five years have you or anyone in your household taken any of these
steps to obtain cleaner water? (install water filter, etc)
Value of Water Quality Improvement
Explain major pollution accident in 1991 that contaminated drinking water of Seoul
If the government takes no action, how many times in the next five years do you
think we will have a similar accident?
[Give one minute description of continuous monitoring system that will warm your
household of contamination]
What is the most your household would pay in taxes for such monitoring?
Age, education, household size, income
Cookbook procedure [1 of 2]
1. Define the “market scenario” or payment
“How much are you willing to pay for …” vs.
“Bond issue has been proposed to pay for …”
2. Determine elicitation method
Direct question, discrete choice, bidding
game, payment card, etc…
3. Design elicitation scheme
Mail, telephone, email, web, in person
Cookbook procedure [2 of 2]
4. Determine sample design
Population, randomization of respondents,
randomization of questions, etc.
5. Determine experimental design
How obtain demand curve and conduct
further analysis to answer question
6. Estimate demand function
Conduct analysis to answer question
Problems with CVM
WTA or WTP?…get different answers.
How real is the budget constraint?
Ambiguity about what is being valued
“Warm Glow”—purchase of moral satisfaction?
Open-ended is unfamiliar market context
Value of one park? Value of suite of parks?
Existence value is a problematic concept since it is
NOAA guidelines for CVM
Pretest for interviewer effects etc.
WTP not WTA
Provide adequate background info.
Remind of substitute commodities
Include & explain non-response option (not $0)
Types of payment vehicle
Payment affects all parties
National tax, local tax, fee or charge
for use, price increase for use.
Note: respondent may disagree with
agency responsible for managing
Donation to trust fund
Note: remember free-riding problem,
also may get strategic bias.
“What is the maximum amount you would be
prepared to pay every year [vehicle] to XXX?”
Straightforward, no implied value cues/anchoring
bias, gives max WTP
Large non-response/protest, unrealistically large
bids, unreliable, unlike normal market transaction
Bidding game elicitation
“Would you pay $X every year via [vehicle—
tax, utility bill]?” [keep increasing bid until
answer is “No” or decrease until “Yes”]
Forces respondent to consider preferences.
Anchor bias, yea-saying, cannot be used in
Payment card elicitation
“Which of the amounts listed below describes your
maximum WTP every year [using vehicle Y] to
improve X?” [list of $ values]
Avoids starting point bias, values can be actual tax or
Range of numbers can induce bias, cannot be used
“Would you pay $X per year using [vehicle] to
improve Y?” [randomly vary X]
Simplifies choice (similar to market),
minimizes non-response, straightforward
May get inflated values, some yea-saying,
less informative, starting point bias.
“Would you pay $X every year using [vehicle]
to improve Y?” [If yes: “And would you pay Z
(>X)?”, If no: “And would you pay W (<X)?”.
More efficient than referendum (because
Same as referendum
Major sources of error in
1. Scenario misspecification
1. Divergence between what respondent is
answering and what researcher is asking
2. Implied value cues
1. Unfamiliar choice problem, respondent
wants to give “right” answer.
3. Strategic bias
1. Low bid (think taxes will inc. but good won’t)
2. High bid (think won’t have to pay for it)
Reliability of CVM estimates
Compare results with comparable
revealed preference results
Construct market & compare results
Use CVM to measure demand for
Test method (same sample over time)
Surveys of purchase intentions and
actual purchases (market research)
1. Green Power Demand
Objective: derive a demand curve for
renewable energy credits in Davis, CA
Advise REC company on pricing and capacity
Bren GP, 2005
400 survey responses from Davis residents
Socioeconomic characteristics, political,
knowledge of green power, etc.
Method: contingent valuation survey
distributed in person to Davis residents
Regression of Yes/No on characteristics,
2. Green building demand
2006 Bren GP
Demand for houses constructed of alternative green
Primarily compressed straw block
Reliability, energy savings, durability, earthquake,
Method: contingent valuation survey by “Knowledge
Networks” – 1000+ responses from across US.
Regression of Yes/No on price, socioeconomics,
location, rainfall, temp, etc.
Second survey to industry – asked to predict consumer
demand…consistent with consumer responses?
Consumer vs. Industry
Spatial density of demand
3. Goose Hunting in Wisconsin
Duck licenses limited in number and issued
Compare three techniques
CVM WTP and WTA bracketed true value
4: Ecotourism in Kenya
Ecotourism captures some of WTP for
Lake Nakuru Nat’l Park in Kenya (360
species of birds)
Farming has reduced water quality
and subsequent wildlife pops.
CVM estimates value park (value to
users only) at $7.5 million.
5: Economic value of
noncommercial fish (US)
Rivers in Four Corners region
2465 miles of river habitat for 9
Protection requires fish bypasses,
passageways, habitat improvements.
What is the economic value of preserving
The application (Four Corners
Maps of critical habitat
Told that officials though habitat
protection too costly, were going to
eliminate critical habitat designation
Asked if they would contribute to “Four
Corners Endangered Fish Trust Fund”
Also told all taxpayers would
Voting for Four Corners fish
If majority votes in favor of
contribution to fund:
Rivers managed for optimum fish
protection. Fish will be saved &
removed from ESA over next 20
If majority votes against
Rivers managed for maximum
hydroelectic output. 4 of 9 would likely
Actual survey instrument
“Suppose a proposal to establish a Four Corners Region
Threatened and Endangered Fish Trust Fund was on the
ballot in the next nationwide election. How would you vote
on this proposal? Remember, by law, the funds could
only be used to improve habitat for fish. If the Four
Corners Region Threatened and Endangered Fish Trust
Fund was the only issue on the next ballot and it would
cost your household $______ every year, would you vote
in favor of it? Circle Yes or No.”
Dollar value randomly chosen from $1 - $350.
Results of Four Corners fish
Survey sent to random sample of 800
Four Corners households. Additional
800 to households in rest of US.
Average WTP = $195.
Extrapolated to rest of population.
Benefits far exceeded costs.
Main criticism of CVM is that it is
Develop an experimental market, with
actual participants to elicit values.
Researcher constructs market,
including the good(s) and money
Observe behavior of subjects (may be
field or laboratory)