Stated Preference Experimental Markets Methods for measuring non market benefits Today s Menu 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 assets What if value or part of value can t be captured within an existing market Answer methods use constructed market What 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 Laboratory Some 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 Greenness Example Seoul CVM Survey Instrument Introduction explain purpose of survey and time to complete 30 min Request background attitudes and info Value of Water Quality Improvement 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 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 income Cookbook 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 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 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 unobserved NOAA 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 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 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 informative starting point bias Double bounded dichotomous choice elicitation 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 For More efficient than referendum because know bounds Against Same as referendum Major sources of error in CVM 1 Scenario misspecification 1 2 Implied value cues 1 3 Divergence between what respondent is answering and what researcher is asking Unfamiliar choice problem respondent wants to give right answer Strategic bias 1 2 Low bid think taxes will inc but good won t 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 market good 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 etc of Yes No on characteristics price Regression results Predicted demand 2 Green building demand 2006 Bren GP Demand for houses constructed of alternative green