UCSB ESM 204 - Stated Preference & Experimental Markets

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Stated Preference & Experimental MarketsToday’s MenuRecall revealed preferenceWhat are constructed market methods?Some examplesHow elicit “willingness to pay”?Value of solar-generated electricityExample – Seoul CVM Survey InstrumentCookbook procedure [1 of 2]Cookbook procedure [2 of 2]Problems with CVMNOAA guidelines for CVMTypes of payment vehicleOpen-ended elicitationBidding game elicitationPayment card elicitationSingle-bounded dichotomous choice elicitation (referendum)Double-bounded dichotomous choice elicitationMajor sources of error in CVMReliability of CVM estimates1. Green Power DemandRegression resultsPredicted demand2. Green building demandConsumer vs. IndustrySpatial density of demand3. Goose Hunting in Wisconsin4: Ecotourism in Kenya5: Economic value of noncommercial fish (US)The application (Four Corners fish)Voting for Four Corners fishActual survey instrumentResults of Four Corners fishExperimental marketsStated Preference & Experimental MarketsMethods for measuring non-market benefitsToday’s MenuConstructed market approachesDesigning a CVM surveyConducting an experimentRecall revealed preferenceRemember, our first choice is always to use “revealed preference” approaches to value environmental assets.What if value (or part of value) can’t be captured within an existing market?Answer: use “constructed market” methodsWhat are constructed market methods?Stated preference methodsMore generally known as “Contingent Valuation Methods” (CVM)•Ask people: “How much is the environmental good worth to you?”Experimental marketsTypical goal: learn how people think about environmental goodsTwo types of experiments•Field•LaboratorySome examples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 Valdez spill?The value of restoring steelhead to Ventura River?The environmental damage from drilling in ANWR?How elicit “willingness to pay”?No market exists within which to measure valueUse surveyMany challenges to do a credible jobNeed to design survey to minimize opportunities for bias of results.Value of solar-generated electricityIntroduction Explain purpose of survey and how long it will take, importance of truthful answersBackground attitudes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)Socioeconomic characteristicsGender, Age, Race, Income, GreennessExample – Seoul CVM Survey Instrument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?Background informationAge, education, household size, incomeCookbook procedure [1 of 2]1. Define the “market scenario” or payment vehicle“How much are you willing to pay for …” vs.“Bond issue has been proposed to pay for …”2. Determine elicitation methodDirect question, discrete choice, bidding game, payment card, etc…3. Design elicitation scheme Mail, telephone, email, web, in personCookbook procedure [2 of 2]4. Determine sample designPopulation, randomization of respondents, randomization of questions, etc.5. Determine experimental designHow obtain demand curve and conduct further analysis to answer question6. Estimate demand functionConduct analysis to answer questionProblems with CVMWTA or WTP?…get different answers.Hypothetical biasHow real is the budget constraint?Ambiguity about what is being valued“Warm Glow”—purchase of moral satisfaction?Open-ended is unfamiliar market contextEmbedding problemValue of one park? Value of suite of parks?Existence value is a problematic concept since it is unobservedNOAA guidelines for CVMMinimize non-responsePersonal interviewsPretest for interviewer effects etc.WTP not WTAReferendum format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 resource.Voluntary paymentDonation to trust fundNote: remember free-riding problem, also may get strategic bias.Open-ended elicitation“What is the maximum amount you would be prepared to pay every year [vehicle] to XXX?”For: Straightforward, no implied value cues/anchoring bias, gives max WTPAgainst:Large non-response/protest, unrealistically large bids, unreliable, unlike normal market transactionBidding game elicitation“Would you pay $X every year via [vehicle—tax, utility bill]?” [keep increasing bid until answer is “No” or decrease until “Yes”]For:Forces respondent to consider preferences.Against: Anchor bias, yea-saying, cannot be used in mail surveys.Payment card elicitation“Which of the amounts listed below describes your maximum WTP every year [using vehicle Y] to improve X?” [list of $ values]For:Avoids starting point bias, values can be actual tax or household benchmarksAgainst: Range of numbers can induce bias, cannot be used on telephone.Single-bounded dichotomous choice elicitation (referendum)“Would you pay $X per year using [vehicle] to improve Y?” [randomly vary X]ForSimplifies choice (similar to market), minimizes non-response, straightforwardAgainst:May get inflated values, some yea-saying, less


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UCSB ESM 204 - Stated Preference & Experimental Markets

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