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Valuing Environmental Benefits Using the Contingent Valuation Method: an Econometric Analysis, 1990 K • -X- t~r1 s U. 3 l \ VALUING ENVIRONMENTAL BENEFITS USING THE CONTINGENT VALUATION METHOD - An Econometric Analysis by Bengt Kriström Umeå Economic Studies No. 219 UNIVERSITY OF UMEÅ 1990 VALUING ENVIRONMENTAL BENEFITS USING THE CONTINGENT VALUATION _________ METHOD_________ An Econometric Analysis AKADEMISK A VHANDUNG Som med vederbörligt tillstånd av rektorsämbetet vid Umeå universitet för vinnande av filosofie doktorsexamen framlägges till offentlig granskning vid institutionen för nationalekonomi hörsal B, Samhällsvetarhuset, Umeå universitet Onsdagen den 23 maj 1990, kl 10.15 av Bengt Kriström Fil. lic. Author and title Bengt Kriström (1990) Valuing Environmental Benefits Using the Contingent Valuation Method - An Econometric Analysis. Umeå Economic Studies No. 219, 168 pages. Abstract The purpose of this study is to investigate methods for assessing the value people place on preserving our natural environments and resources. It focuses on the contingent valuation method, which is a method for directly asking people about their preferences. In particular, the study focuses on the use of discrete response data in contingent valuation experiments. The first part of the study explores the economic theory of the total value of a natural resource, where the principal components of total value are analyzed; use values and non-use values. Our application is a study of the value Swedes' attach to the preservation of eleven forest areas that contain high recreational values and contain unique environmental qualities. Six forests were selected on the basis of an official investigation which includes virgin forests and other areas with unique environmental qualities. In addition, five virgin forests were selected. Two types of valuation questions are analyzed, the continuous and the discrete. The first type of question asks directly about willingness to pay, while the second type suggests a price that the respondent may reject or accept. The results of the continuous question suggest an average willingness to pay of about 1,000 SEK per household for preservation of the areas. Further analysis of the data suggests that this value depends on severi characteristics of the respondent: such as the respondent's income and whether or not the respondent is an altruist. Two econometric approaches are used to analyze the discrete responses; a flexible parametric approach and a non-parametric approach. In addition, a Bayesian approach is described. It is shown that the results of a contingent valuation experiment may depend to some extent on the choice of the probability model. A re-sampling approach and a Monte-Carlo approach is used to shed light on the design of a contingent valuation experiment with discrete responses. The econometric analysis ends with an analysis of the often observed disparity between discrete and continuous valuation questions. A cost-benefit analysis is performed in the final chapter. The purpose of this analysis is to illustrate how the contingent valuation approach may be combined with opportunity cost data to improve the decision-basis in the environmental policy domain. This analysis does not give strong support for a cutting alternative. Finally, the results of this investigation are compared with evidence from other studies. The main conclusion of this study is that assessment of peoples' sentiments towards changes of our natural environments and resources can be a useful supplement to decisions about the proper husbandry of our natural environments and resources. It also highlights the importance of careful statistical analysis of data gained from contingent valuation experiments. Keywords: environmental benefits, contingent valuation, econometrics, discrete response data, continuous and discrete valuation questions, cost-benefit analysis. Distribution and author's address : Department of Economics, University of Umeå, S-901 87 Umeå. ISSN : 0348-1018 ISBN: 91-7174-481-9 VALUING ENVIRONMENTAL BENEFITS USING THE CONTINGENT VALUATION METHOD - An Econometric Analysis by Bengt Kriström Umeå Economic Studies No. 219 UNIVERSITY OF UMEÅ 1990 Copyright Bengt Kriström Institutionen för nationalekonomi Umeå universitet 1990 ISSN: 0348-1018 ISBN: 91-7174-481-9 Solfjädern Offset AB, Umeå 1990 DEDICATED TO MY PARENTS Abstract The purpose of this study is to investigate methods for assessing the value people place on preserving our natural environments and resources. It focuses on the contingent valuation method, which is a method for directly asking people about their preferences. In particular, the study focuses on the use of discrete response data in contingent valuation experiments. The first part of the study explores the economic theory of the total value of a natural resource, where the principal components of total value are analyzed; use values and non-use values. Our application is a study of the value Swedes' attach to the preservation of eleven forest areas that contain high recreational values and contain unique environmental qualities. Six forests were selected on the basis of an official investigation which includes virgin forests and other areas with unique environmental qualities. In addition, five virgin forests were selected. Two types of valuation questions are analyzed, the continuous and the discrete. The first type of question asks directly about willingness to pay, while the second type suggests a price that the respondent may reject or accept. The results of the continuous question suggest an average willingness to pay of about 1,000 SEK per household for preservation of the areas. Further analysis of the data suggests that this value depends on several characteristics of the respondent: such as the respondent's income and whether or not the respondent is an altruist. Two econometric approaches are used to analyze the discrete responses; a flexible parametric approach and a non-parametric approach. In addition, a Bayesian approach is described. It is shown that the results of a contingent valuation experiment may depend to some extent on the choice of the probability model. A re-sampling approach and a Monte-Carlo approach is used to shed light on the design of a contingent valuation experiment with discrete responses. The econometric analysis ends with an analysis of the often observed disparity between discrete and continuous valuation questions. A cost-benefit analysis is performed in the final chapter. The purpose of this analysis is to illustrate how the contingent valuation approach may be combined with opportunity cost data to improve the decision-basis in the environmental policy domain. This analysis does not give strong support for a cutting alternative. Finally, the results of this investigation are compared with evidence from other studies. The main conclusion of this study is that assessment of peoples' sentiments towards changes of our natural environments and resources can be a useful supplement to decisions about the proper husbandry of our natural environments and resources. It also highlights the importance of careful statistical analysis of data gained from contingent valuation experiments. Keywords: environmental benefits, contingent valuation, econometrics, discrete response data, continuous and discrete valuation questions, cost-benefit analysis. -II- — Ill — Acknowledgments This study is a report from one of the projects pursued within Naturresursgruppen (The Natural Resources Group) that started at the Department of Forest Economics, the Swedish University of Agricultural Sciences (SLU), Umeå in 1985. The group consists of Professor Per-Olov Johansson, Associate Professor Leif Mattsson, and myself. Per-Olov formed the group, and he asked me in 1986 to join him and Leif to do research on environmental economics with main focus on the theory and measurement of environmental benefits. I have been fortunate to have Per—Olov as my advisor and I remain in deep gratitude to him for his encouragement, his willingness to discuss whatever problem I have encountered, and his willingness to comment unsparingly on various versions of this thesis. His sincere interest in the development of his own graduate students is the hallmark of a fine advisor. Leif has willingly served as a co-mentor throughout the years. In addition he sharpened and corrected earlier versions of the thesis. In all, Naturresursgruppen has been a very stimulating environment to work within for an environmental economist in the making. The ebullient Professor Karl-Gustaf Lofgren, Department of Economics, University of Umeå, hired me as a research assistant (a very long time ago) and has remained irresistibly encouraging and helpful throughout the years. He has also served as the undisputed manager of the well-known Faustmann Riders. Moreover, he provided detailed comments on earlier versions of the manuscript in his characteristically sharp and merciless way. I had the good fortune to be able to spend eight months at the Department of Agricultural and Resource Economics, University of California at Berkeley, Autumn 1988 to spring 1989. Professor W. Michael Hanemann, my academic sponsor, made this visit a most fruitful one, not only in the academic domain. I generated many of the ideas collected in this thesis in conjunction with this stay, many of them originating from -IV- discussions with Michael. Professor Loy Sammett, Assistant Professor Larry Karp, Dr. David Chapmann, Dr. Julie Hewitt and Dr. Barbara Kanninen commented helpfully on parts of the manuscript available at that time. Mr. Yoshio Masubuchi, a
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