Title: The contingent valuation debate: Why economists should care.

Subject(s): VALUATION -- Methodology

Source: Journal of Economic Perspectives, Fall94, Vol. 8

Issue 4, p3, 15p

Author(s): Portney, Paul R.

Abstract: Provides an overview of the technique and debate

surrounding the contingent valuation method.

Importance of the contingent valuation debate to

economists; Origins; Describing the methodology;

Guidelines in the application of the contingent

valuation method.

AN: 9501060640

ISSN: 0895-3309

Full Text Word Count: 6519

Database: Academic Search Elite

THE CONTINGENT VALUATION DEBATE: WHY ECONOMISTS SHOULD CARE

The contingent valuation method involves the use of sample surveys

(questionnaires) to elicit the willingness of respondents to pay for

(generally) hypothetical projects or programs. The name of the method refers

to the fact that the values revealed by respondents are contingent upon the

constructed or simulated market presented in the survey. A spirited (and

occasionally mean-spirited) battle over such methods is currently being

waged, involving competing factions within the federal government,

economists and lawyers representing business and environmental groups, and

interested academics as well. At issue is a seemingly quite specific

question: should environmental regulations currently under development at

both the Department of the Interior and the Department of Commerce sanction

the use of the contingent valuation method in estimating the damage done by

spills of oil, chemicals, or other substances covered by federal law? More

generally, the debate raises broad questions about what economists have to

say about the values that individuals place on public or private goods.

The two papers that follow this one make cases for and against the use of

the contingent valuation method. My aim here is to provide an overview of

the technique and the debate surrounding it. I also want to suggest why this

debate should matter to economists, both professionally and in their roles

as citizens and consumers.

The Origins of the Contingent Valuation Method

As is often the case, it is useful to start with a bit of history.[1]

The first published reference to the contingent valuation method apparently

occurred in 1947, when Ciriacy-Wantrup wrote about the benefits of

preventing soil erosion (Ciriacy-Wantrup, 1947). He observed that some of

these favorable effects (like reduced siltation of streams) were public

goods, and suggested that one way to obtain information on the demand for

these goods would be to ask individuals directly how much they would be

willing to pay for successive increments. However, he never attempted to

implement this idea directly.

It wasn't until almost two decades later that the contingent valuation

method began to be applied in academic research. In his efforts to determine

the value to hunters and wilderness lovers of a particular recreational

area, Davis (1963) designed and implemented the first contingent valuation

survey that attempted to elicit these values directly.

As a test for the reasonableness of his findings, Davis compared them with

an estimate of willingness-to-pay that was based on the "travel cost"

approach. The notion here, first suggested by Hotelling in a letter to the

National Park Service in 1947, is that the "price" for visiting a park or

other recreational area (even one for which entry is free) will vary

according to the travel costs of visitors coming from different places (see

also Clawson, 1959). Thus, a natural experiment exists where one can measure

the quantity of visits to the park demanded by people at a range of prices

(that is, coming from different distances) and estimate a demand curve,

consumer surplus, and so on. Davis found that the travel cost method of

estimating willingness to pay for visits to a recreation area provided a

quite similar answer to his contingent valuation survey.

Natural resource and environmental economics then took an enormous jump when

John Krutilla published "Conservation Reconsidered," arguably the most

influential paper ever written in that subdiscipline (Krutilla, 1967). In

less than ten pages, Krutilla identified the importance of the essentially

irreversible nature of the development of natural environments, suggested

that the divergence between willingness-to-pay and willingness-to-accept

compensation for what he called "grand scenic wonders" may be especially

large,[2] pointed to the potentially large economic value of preserving

genetic variation, and fore-shadowed the apparently growing value of outdoor

recreation and wilderness preservation relative to what he referred to as

"fabricated goods." Most important for our purposes here, Krutilla raised

the possibility in this paper of what is now known as "existence value."

This is the value that individuals may attach to the mere knowledge that

rare and diverse species, unique natural environments, or other "goods"

exist, even if these individuals do not contemplate ever making active use

of or benefitting in a more direct way from them. Existence value is

sometimes referred to as nonuse or passive use value to suggest that the

utility derived does not depend on any direct or indirect interaction with

the resource or good in question.

Since then, researchers in natural resource and environmental economics (and

other branches of economics as well) have made increasing use of contingent

valuation techniques to estimate existence values and many other things, as

well.[3] For instance, surveys were used to elicit individuals' willingness

to pay for such things as a reduction in household soiling and cleaning

(Ridker, 1967), the right to hunt waterfowl (Hammack and Brown, 1974),

reduced congestion in wilderness areas (Cicchetti and Smith, 1973), improved

visibility in the Southwest (Randall, Ives, and Eastman, 1974), and the

value of duck hunting permits (Bishop and Heberlein, 1979), to name but a

few. Moreover, contingent valuation methods have been used for the valuation

of a large number of non-environmental policies or programs, such as reduced

risk of death from heart attack (Acton, 1973), reduced risk of respiratory

disease (Krupnick and Cropper, 1992), and improved information about grocery

store prices (Devine and Marion, 1979).

But while such studies formed a sort of academic industry, none of them were

designed or implemented with litigation in mind. It was not until the late

1980s that contingent valuation studies began to receive the kind of

scrutiny routinely devoted to the evidence in high-stakes legal proceedings.

Describing the Methodology

There is no standard approach to the design of a contingent valuation

survey. Nevertheless, virtually every application consists of several

well-defined elements.[4]

First, a survey must contain a scenario or description of the (hypothetical

or real) policy or program the respondent is being asked to value or vote

upon. Sticking to environmental issues, this might be a regulatory program

that will reduce air pollution concentrations, a land acquisition program to

protect wildlife habitats, or a program to reduce the likelihood of oil

spills, to name but a few. In some cases, these scenarios are quite

detailed, providing information on the expected effects of the program as

well as the likely course of events should the program not be adopted. For

instance, the scenario might contain an estimate of the reduction in annual

mortality risk that would be expected to accompany an improvement in air

quality; or it might explain the rate at which an endangered species would

be expected to recover if it was given additional protection. In other

words, the scenario is intended to give the respondent a clear picture of

the "good" that the respondent is being asked to value.

Next, the survey must contain a mechanism for eliciting value or a choice

from the respondent. These mechanisms can take many forms, including such

things as open-ended questions ("What is the maximum amount you would be

willing to pay for . . . ?"), bidding games ("Would you pay $5 for this

program? Yes? Would you pay $107 What about . . . ?") or referendum formats

("The government is considering doing X. Your annual tax bill would go up by

Y if this happens. How would you vote?").

Finally, contingent valuation surveys usually elicit information on the

socioeconomic characteristics of the respondents (age, race, sex, income,

education, marital status, and so on), as well as information about their

environmental attitudes and/or recreational behavior, usually with an eye

toward estimating a willingness-to-pay function that includes these

characteristics as possible explanatory variables. They may also include

follow up questions to see if the respondent both understood and believed

the information in the scenario and took the hypothetical decision-making

exercise seriously.

Moving to the Policy Arena

When economists attempt to infer values, we prefer evidence based on actual

market behavior, whether directly or indirectly revealed. Thus, a technique

like the contingent valuation method--wherein values are inferred from

individuals' stated responses to hypothetical situations--could readily be

expected to stir lively debate in academic seminars and in the pages of

economics journals. But why has the controversy over the contingent

valuation method spilled over into the "real world," and why has it become

so heated?

The answer lies in two federal laws and one very unfortunate accident. These

three things have resulted in government agencies bringing lawsuits against

a variety of parties in which the former are attempting to recover large

sums of money from the latter for lost existence values (among other types

of damages) resulting from damages to natural resources. Many regard the

contingent valuation method as being the only technique currently capable of

providing monetary estimates of the magnitudes of these losses.

The first law is the Comprehensive Environmental Response, Compensation and

Liability Act of 1980, also referred to as CERCLA or, more commonly, as the

Superfund law. Its primary purposes were to create a mechanism for

identifying sites at which hazardous materials posed a threat to human

health or the environment, and to establish procedures through which parties

that were deemed responsible for the contamination could be identified and

made to pay for the cleanup.

But the Superfund law also contains a sleeper provision: it gave government

agencies the right to sue for damages to the natural resources for which

they were trustees (including lakes, streams, forests, bays, bayous,

marshes, land masses, and so on) resulting from discharges of hazardous

substances. The Department of the Interior was subsequently directed to

write regulations spelling out what kinds of damages were compensable under

this section of Superfund and what kinds of techniques would be admissible

for damage estimation. Thus did existence values and the contingent

valuation method come to meet the real world.

In 1986, the Department of the Interior (DOI) issued these regulations.[5]

Oversimplifying somewhat, the regulations specified that lost nonuse values

(largely lost existence values) were recoverable under Superfund only if use

values were not measurable, and--in a very qualified way--sanctioned the use

of the contingent valuation technique to measure damages. In response to a

number of legal challenges, in 1989 a federal court of appeals directed DOI

to redraft its regulations, specifically instructing the department to give

equal weight to use and nonuse values in damage assessments and to treat the

contingent valuation method much more seriously as a valuation technique.[6]

To some extent, however, events overtook the Department of the Interior

regulations. In March 1989, the supertanker Exxon Valdez ran aground on

Bligh Reef in Prince William Sound, Alaska, spilling 11 million gallons of

crude oil into the sea. Although a number of natural resource damage cases

had been brought by individual states and the federal government up to that

time, none of the incidents precipitating the suits had nearly the

visibility and impact of that spill. Among other things, that accident

dramatized the potential economic impact of the DOI regulations. Indeed, if

in addition to the out-of-pocket losses suffered by fishermen, resort

owners, tour guides, recreationists and others directly and indirectly

harmed by the accident, Exxon would be forced to pay also for lost nonuse or

existence values, the ante would be raised substantially. This possibility

focused the attention of Exxon and many other companies on existence values

and the contingent valuation method.

The Exxon Valdez spill also caught the attention of Congress. It promptly

passed an altogether new law, the Oil Pollution Act of 1990, aimed at

reducing the likelihood of future oil spills and providing for damage

recovery for any spills that should occur. Under the new law, the Department

of Commerce--acting through the National Oceanic and Atmospheric

Administration, or NOAA--was directed to write its own regulations governing

damage assessment. This became the next battlefield on which to fight about

the legitimacy of existence values and the contingent valuation method.

The NOAA Panel

The Department of the Interior had worked in relative obscurity when

drafting its damage assessment regulations under Superfund. By contrast,

NOAA began its parallel task under a spotlight. Environmentalists insisted

that the NOAA rules parallel those of Interior, embracing lost existence

values as fully compensable damages and identifying the contingent valuation

method as the appropriate way to measure them. Not surprisingly, those upon

whom these assessments might one day fall--led by the oil companies--pushed

hard to exclude existence values and the contingent valuation method from

the regulations. Amidst these conflicting pressures, and in recognition of

the technical economic nature of the questions at debate, the General

Counsel of NOAA, Thomas Campbell, took an unusual step. He asked Nobel

laureates Kenneth Arrow and Robert Solow if they would chair a panel of

experts to provide advice to NOAA on the following question: is the

contingent valuation method capable of providing estimates of lost nonuse or

existence values that are reliable enough to be used in natural resource

damage assessments?[7]

It is important to note that the panel was not asked its opinion on the

legitimacy of existence values per se. This may have been because the court

of appeals had earlier ruled, in the case of the Department of the Interior

regulations, that lost existence values were to be treated the same as other

economic losses in damage assessments; whatever the reason, the panel was

asked to confine its attention solely to the potential reliability of the

contingent valuation method.

The NOAA panel met eight times between June and November of 1992. This

included an extraordinary all-day hearing in August during which it heard

statements from 22 experts, including several of the most prominent names in

the economics profession, who either extolled the virtues of the contingent

valuation method or condemned it. The panel completed its deliberations in

December and, on January 11, 1993, submitted its report to NOAA. The report

was published in the Federal Register on January 15, 1993.[8]

The NOAA panel may have managed to upset everyone with its report. Those

opposed to the use of the contingent valuation method were disappointed by

what many took to be the "bottom line" of the panel report. This was the

phrase, ". . . the Panel concludes that CV studies [applications of the

contingent valuation method] can produce estimates reliable enough to be the

starting point of a judicial process of damage assessment, including lost

passive-use values." Not surprisingly, this conclusion cheered those

government agencies, academic researchers, and others wishing to make

continued application of the contingent valuation method in their work.

Nevertheless, the panel reached this conclusion with some reluctance. I

believe it fair to say that none of its members would have been comfortable

with the use of any of the previous applications of the contingent valuation

method as the basis for actual monetary damage awards. (To reiterate, none

of these studies was intended for this purpose.) For this reason, the panel

established a set of guidelines to which it felt future applications of the

contingent valuation method should adhere, if the studies are to produce

reliable estimates of lost existence values for the purposes of damage

assessment or regulation. Although these guidelines are too numerous to

reproduce in their entirety here, seven of the most important are summarized

here.

First, applications of the contingent valuation method should rely upon

personal interviews rather than telephone surveys where possible, and on the

telephone surveys in preference to mail surveys.

Second, applications of the contingent valuation method should elicit

willingness to pay to prevent a future incident rather than minimum

compensation required for an incident that has already occurred. (Note that

the latter would be the theoretically correct measure of damages for an

accident that has already taken place.)

Third, applications of the contingent valuation method should utilize the

referendum format; that is, the respondents should be asked how they would

vote if faced with a program that would produce some kind of environmental

benefit in exchange for higher taxes or product prices. The panel reasoned

that because individuals are often asked to make such choices in the real

world, their answers would be more likely to reflect actual valuations than

if confronted with, say, open-ended questions eliciting maximum willingness

to pay for the program.

Fourth, applications of the contingent valuation method must begin with a

scenario that accurately and understandably describes the expected effects

of the program under consideration.

Fifth, applications of the contingent valuation method must contain

reminders to respondents that a willingness to pay for the program or policy

in question would reduce the amount they would have available to spend on

other things.

Sixth, applications of the contingent valuation method must include

reminders to respondents of the substitutes for the "commodity" in question.

For example:, if respondents are being asked how they would vote on a

measure to protect a wilderness area, they should be reminded of the other

areas that already exist or are being created independent of the one in

question.

Seventh, applications of the contingent valuation method should include one

or more follow-up questions to ensure that respondents understood the choice

they were being asked to make and to discover the reasons for their answer.

These guidelines made a number of proponents of the contingent valuation

method quite unhappy. In their view, strict adherence to the panel's

guidelines--especially the suggestion that in-person interviews be used to

elicit values--would make it very expensive to use the contingent valuation

method for damage estimation or regulatory purposes. Moreover, a number of

the guidelines seem intended to ensure that applications of the contingent

valuation method result in "conservative" estimates of lost existence

values--that is, estimates that were more likely to underestimate than to

overestimate these values.

The NOAA panel created its long list of requirements because it felt

strongty that casual applications of the contingent valuation method should

not be used to justify large damage awards, especially in cases where the

likelihood of significant lost existence values was quite small. By

establishing a series of hurdles for contingent valuation studies to meet,

the panel hoped to elevate considerably the quality of future studies and

thereby increase the likelihood that these studies would produce estimates

that could be relied on for policy purposes.

It should be noted in closing that the NOAA panel report had no special

legal standing in NOAA's deliberations. Instead, it was one of literally

hundreds of submissions pertaining to the contingent valuation method that

NOAA received during the time it was drafting its proposed regulations.

Nevertheless, when NOAA published its long-awaited proposed rules on January

7, 1994, it said: "In proposing its standards for the use of CV [contingent

valuation] in the damage assessment context, NOAA has relied heavily on the

recommendations of the Panel."[9] For instance, the proposed regulations

encourage trustees conducting contingent valuation studies to consider using

the referendum format, and in-person interviews, as the panel had suggested.

In addition, the proposed regulations include a requirement that contingent

valuation studies test for the sensitivity of responses to the scope of the

damage described in the scenario. The NOAA panel had suggested that if

respondents were not willing to pay more to prevent more serious accidents,

say, other things being equal, the contingent valuation survey was unlikely

to produce reliable results. Interestingly, when the Department of the

Interior re-proposed its regulations pertaining to contingent valuation on

May 4, 1994, it too included a requirement that contingent valuation studies

test for sensitivity to scope.[10] The papers by Diamond and Hausman and

also Hanemann in this issue discuss "scope tests" in some detail

The Importance of the Contingent Valuation Debate

Economists should have a strong interest in the debate surrounding the

contingent valuation method. The most obvious reasons have to do with the

economic stakes involved; but these are not the only reasons.

Natural Resource Damage Assessments

Currently, the Department of Commerce (acting through NOAA) is involved in

approximately 40 lawsuits in which it is seeking to recover damages for

injury to the natural resources for which it is trustee. The Department of

the Interior is involved in roughly another 20 cases. The contingent

valuation method figures into no more than a dozen of these 60 or so cases,

though it could prove to be quite influential in those cases.

To illustrate, consider the case of the Exxon Valdez. In late 1991, Exxon

settled the natural resource damage suits brought against it by both the

federal government and the State of Alaska for $1.15 billion, payable over

11 years. Yet, a state-of-the-art study done for the State in Alaska in the

wake of the accident--one using the contingent valuation method to estimate

lost existence values nationally--concluded that these losses alone amounted

to nearly $3 billion (Carson et al., 1992). Because the case involving the

Exxon Valdez was settled out of court, as have all cases involving the

contingent valuation method to this point, it is impossible to know whether

this study affected the size of the settlement.

It seems highly likely, however, that applications of the contingent

valuation method will influence future damage awards or out-of-court

settlements. Several of the most heavily regulated industries in the United

States are among those affected by either Superfund or the Oil Pollution

Act; the chemical and petroleum refining industries are potentially affected

by both statutes. This in turn has implications for the amount of deterrence

they and others will undertake. If existing state and federal environmental

regulations, coupled with the specter of tort liability, already induce

something close to the "right" amount of preventive activity by firms in

these industries, the possibility of additional liability for lost existence

values will push firms beyond the social optimum. On the other hand, if lost

existence values are widely accepted as real economic losses that these

firms have been ignoring heretofore, the imposition of liability for these

losses may move firms closer to the optimum.

These cases alluded to earlier do not provide the only opportunity for

damage recovery under Superfund. Currently, there are more than 1,200 sites

on EPA's National Priorities List--the list of sites which can be cleaned up

using money from the trust fund created for that purpose. Once the

appropriate remedy has been selected and implemented at each of these sites,

and once liability for the cost of this cleanup has been affixed, the

trustees for any damaged resources, such as contaminated groundwater, can

bring natural resource damage suits against the responsible parties. In

these cases, contingent valuation could be used to estimate possible lost

existence values.

New Regulations

Virtually all of the attention that the contingent valuation method has

attracted in the policy world has been in the context of natural resource

damage assessments under Superfund and the Oil Pollution Act. Nevertheless,

I believe that the most significant applications of the contingent valuation

method will involve the estimation of the benefits and costs of proposed

regulations under Superfund and particularly other environmental laws.

Regulated entities in the United States--private firms, agencies at the

federal, state, and local levels, and individuals--currently spend an

estimated $130 billion annually to comply with federal environmental

regulations alone (EPA, 1990). This is about 2.2 percent of GDP, a larger

fraction than is devoted to environmental compliance expenditures anywhere

else in the world. Much less is known about the annual compliance

expenditures necessitated by other federal regulatory agencies. However,

based on a comprehensive review of previous analyses, Hopkins (1992)

cautiously estimated that annual compliance expenditures for all federal

regulation, environmental and otherwise, were in the vicinity of $400

billion.

Under Executive Order 12044 issued by President Carter, Executive Order

12291 issued by President Reagan, and Executive Order 12866 issued by

President Clinton, all federal regulatory agencies must make an effort to

quantify as many of the benefits and costs of their proposed actions as

possible.[11] This is where applications of the contingent valuation method

will likely become important.

Imagine, for example, a proposed regulation that would cost a great deal of

money but would provide relatively little in the way of direct benefits in

the areas where environmental quality would improve. In such a case, it may

be tempting for the regulatory agency to justify its proposed action by

alleging that individuals throughout the country derive a psychological

benefit (an existence value) from knowing that environmental quality has

been improved in the affected areas--even though there will be no

environmental improvements in the areas in which they live. A contingent

valuation study might be produced to support this assertion, and might make

the difference as to whether the proposal passes a benefit-cost test.

There is no reason why existence values should be unique to environmental

policy, either. For instance, I might derive utility from knowing that

factories are safer as a result of Occupational Safety and Health

Administration regulations, that pharmaceuticals carry less risk because of

the oversight of the Food and Drug Administration, and that swimming pool

slides are safer because of the vigilance of the Consumer Product Safety

Commission. All this may be so even though I do not work in a factory, take

prescription drugs, or have a swimming pool. In other words, individuals may

have existence values for many different "goods," and the inclusion of such

values in a regulatory analysis could markedly alter the decision-making

calculus.

Which leads me to what I believe has been an important and largely

overlooked point in the debate about existence values and the contingent

valuation method. To this point, proponents of the technique have envisioned

its being used to estimate lost existence values and other benefits of

proposed regulatory programs. Thus, the business community tends to oppose

such methods because it believes the methods will only be used to support

expansive regulation and large damage awards.

But sauce for the goose is surely sauce for the gander. Since costs are the

duals of benefits, I see no reason why the contingent valuation method

cannot or should not be used for the estimation of regulatory costs as well

as benefits.

Consider a hypothetical regulation that would increase costs for a number of

petroleum refineries and would force several others to shut down. For the

purposes of the required benefit-cost analysis, the EPA would usually count

as costs the annual capital cost of the equipment installed by the

refineries that would remain in operation, plus any additional annual

operating and maintenance costs they would incur. An unusually thorough

analysis might occasionally include the (generally temporary) loss of or

reduction in income of the workers whose jobs would be lost as a result of

the regulation. But typically, the extent of the cost analysis is limited to

out-of-pocket expenditures for new pollution control equipment or cleaner

fuels.

With contingent valuation available to measure lost existence values, the

matter is surely more complicated than this.[12] If I derive some utility

from the mere existence of certain natural environments I never intend to

see (which I do), might I not also derive some satisfaction from knowing

that refineries provide well-paying jobs for hard-working people, even

though neither I nor anyone I know will ever have such a job? I believe I

do. Thus, any policy change that "destroys" those jobs imposes a cost on

me--a cost that, in principle, could be estimated using the contingent

valuation method.

Since regulatory programs will always impose costs on someone--taking the

form of higher prices, job losses, or reduced shareholder earnings--lost

existence values may figure every bit as prominently on the cost side of the

analytic ledger as the benefit side. To my knowledge, however, no business

organization has commissioned an application of the contingent valuation

method to ascertain the empirical significance of these potential additional

costs, nor has any academic independently undertaken one.

If the concept of existence value comes to be more broadly interpreted in

economics, as I have suggested above that it should, and if the contingent

valuation method comes to be regarded as a reliable way to measure these

values, then applied benefit-cost analysis may be forever changed. It is

already difficult to conduct such analyses for government programs that

impose hard-to-value, non-pecuniary costs on individuals, that change the

distribution of income (either at a point in time or between generations),

that affect mortality or morbidity, and that involve the preservation of

genetic resources.

Imagine now the difficulty of doing applied benefit-cost analysis when

virtually every citizen in the United States is potentially benefitted or

injured by virtually every possible program. In principle, at least, it will

become extraordinarily difficult to draw bounds around those likely to gain

and lose so as to facilitate valuation.

In practice, this problem may be somewhat less daunting. Perhaps it will

turn out that existence values apply on the benefit side only in cases of

truly unique natural environments like the Grand Canyon, irreplaceable

"assets" like the Declaration of Independence, or programs that

substantially improve the lives of many beneficiaries. On the other side of

the ledger, perhaps only policy changes that inflict massive economic harm

on certain groups of people or certain regions will generate losses among

those not directly affected by the policy. If so, applied benefit-cost

analysis may survive intact, but this empirical question is one that

economists ought to be interested in answering.

Putting Theory Into Practice

A final set of reasons for economists to care about the contingent valuation

debate have less to do with policy consequences, and more to do with how

contingent valuation is affecting economic theory and the practice of

empirical economics.

Whatever its shortcomings, the contingent valuation method would appear to

be the only method capable of shedding light on potentially important

values. Some environmental benefits can be measured in indirect ways. For

example, the benefits of air quality improvements can manifest themselves in

residential property values; enhanced workplace health and safety may be

reflected in wage rates; improvements in recreational opportunities may be

revealed in reduced travel costs. But there is simply no behavioral trace

through which economists can glean information about lost existence values.

The only likely candidate for such information that I am aware of is

voluntary contributions to national or international conservation

organizations. But these groups typically provide their contributions with a

mixture of public and private goods (an attractive magazine or calendar, for

example), which makes it almost impossible to determine how much of one's

contribution represents a willingness to pay for the pure preservation of

unique natural areas or genetic resources. In addition, many contributors to

these organizations visit (make active use of) the protected areas, thus

making it difficult to separate active from passive use values. Finally, the

public good nature of the benefits of preservation means that there will be

a tendency to underprovide on account of free riding.

According to proponents of the contingent valuation method, asking people

directly has the potential to inform about the nature, depth, and economic

significance of these values. Economists who hold this position readily

admit that direct elicitation of these values will require the skills of

other social scientists, including survey research specialists, cognitive

psychologists, political scientists, marketing specialists, sociologists,

and perhaps even philosophers. In fact, the critical scrutiny directed at

the contingent valuation method has led some economists to think more deeply

about cognitive processes, rationality, and the nature of preferences for

all goods, public or private. We may, in other words, come out of this

debate with an improved theory of preference and choice.

Another (and related) reason to care about the contingent valuation method

debate has to do with the importance of encouraging the development of new

analytical techniques. Here the parallels to experimental economics seem to

me to be instructive. It was not so long ago that Vernon Smith, Charles

Plott and a handful of other economists began to create artificial markets

in "laboratory" settings. One purpose was to see whether hypotheses about

market equilibra-tion derived from theoretical models were borne out in

laboratory settings. Since that time, experimental methods have been used to

inform real-word policy-making, including, among other cases, the allocation

of airport landing slots by the Civil Aeronautics Board, the auction of

T-bills by the Department of Treasury, the sale of air pollution emission

allowances by the Environmental Protection Agency, and the design of natural

gas contracts by the Federal Energy Regulatory Commission.

Yet despite its increasing acceptance in the economics profession, and its

apparent usefulness to decision makers, experimental economics has not had

an easy go. Its early critics claimed that the "artificiality" of the

laboratory setting rendered meaningless the findings of experimental

studies. And it is my impression (but only that) that some journal editors

have been reluctant to embrace papers based on experimental studies. To this

day, some critics still have grave doubts about its utility.

This seems to me not unlike the state of play regarding the contingent

valuation method today. Its detractors have argued that the technique is not

only currently unable to provide reliable estimates of lost existence

values, but also that it will never be able to do so. On the other hand, at

least some proponents of the contingent valuation method appear to believe

that even casual applications can produce results reliable enough to be used

as the basis for potentially significant damage awards. Both views were

rejected by the NOAA panel.

The present struggle is over whether some middle ground exists. There do

exist quite careful and thorough applications of the contingent valuation

method, with the work of Carson et al. (1992) on the Exxon Valdez oil spill

being the best example. I am reluctant to assert that even this study is

sufficient to justify monetary penalties. But the estimates from that study

are convincing enough to me to suggest that the contingent valuation method

should be the object of further research and lively intellectual debate.

Conclusion

Whether the economics profession likes it or not, it seems inevitable to me

that contingent valuation methods are going to play a role in public policy

formulation. Both regulatory agencies and governmental offices responsible

for natural resource damage assessment are making increasing use of it in

their work. This has now been reinforced by the Department of the Interior

and NOAA-proposed regulations sanctioning the use of the contingent

valuation method. Surely, it is better for economists to be involved at all

stages of the debate about the contingent valuation method, than to stand by

while others dictate the way this tool will be used.

* For helpful comments on earlier drafts of this paper, thanks are due

Kenneth Arrow, Richard Carson, Ronald Cummings, Peter Diamond, Rick Freeman,

Michael Hanemann, Glenn Harrison, Barbara Kanninen, Raymond Kopp, Alan

Kreuger, Edward Learner, Robert Mitchell, Richard Schmalensee, Howard

Schuman, Carl Shapiro, Robert Solow, and especially Kerry Smith and Timothy

Taylor. Taylor's many editorial suggestions improved the paper greatly. Any

errors are the author's responsibility alone.

1 For a more elegant and detailed history, see Hanemann (1992).

2 Hanemann (1991) explores this question in a rigorous way.

3 For an extraordinary bibliography of papers and studies related to the

contingent valuation method, a bibliography that includes 1674 entries. see

Carson et al. (1994).

4 For a thorough description of the contingent valuation method, see

Mitchell and Carson (1989).

5 See 51 Federal Register 27674 (August 1, 1986).

6 State of Ohio v. United States Department of Interior, 880 F. 2d 432 (D.C.

Circuit 1989).

7 In addition to Arrow and Solow, the panel included Edward Learner, Roy

Radner, Howard Schuman (a professor of sociology and survey research

expert), and myself.

8 See 58 Federal Register 4601 (January 15, 1993).

9 See 59 Federal Register 1062 (January 7, 1994), p. 1143.

10 See: 59 Federal Register 2309 (May 4, 1994).

11 Strangely enough, this requirement holds true even when the agency is not

allowed to engage in benefit-cost balancing in setting certain kinds of

standards. For example, the key sections of many environmental statutes

forbid balancing benefits and costs, although such trade-offs are permitted

in other parts of these laws and are even required in some other laws

(Portney, 1990).

12 Even without the concerns raised by contingent valuation, a number of

questions can be raised about the very straightforward cost analysis

described here. For example, Hazilla and Kopp (1990) have shown that if one

takes a general equilibrium approach to social cost estimation, very

different results are obtained when compared to those from a traditional

partial equilibrium analysis. This calls into question previous estimates of

regulatory compliance costs (see also Jorgenson and Wilcoxen, 1990).

References

Acton, Jan, "Evaluating Public Progress to Save Lives:

The Case of Heart Attacks," RAND Research Report R-73-02.

Santa Monica: RAND Corporation, 1973.

Bishop, Richard, and Thomas Heberlein, "Measuring Values of

Extramarket Goods: Are Indirect Measures Biased?,"

American Journal of Agricultural Economics, December

1979, 61, 926-30.

Carson, Richard, et al, A Contingent Valuation Study of Lost

Passive Use Values Resulting From the Exxon Valdez Oil

Spill, Report to the Attorney General of the State of

Alaska, prepared by Natural Resource Damage Assessment,

Inc., La Jolla, California, 1992.

Carson, Richard, et al., A Bibliography of Contingent

Valuation Studies and Papers. La Jolla, California:

Natural Resources Damage Assessment, Inc., 1994.

Cicchetti, Charles J., and V. Kerry Smith, "Congestion,

Quality Deterioration, and Optimal Use: Wilderness

Recreation in the Spanish Peaks Primitive Area," Social

Science Research, 1973, 2, 15-30.

Ciriacy-Wantrup, S. V., "Capital Returns from Soil

Conservation Practices," Journal of Farm Economics,

November 1947, 29, 1181-96.

Clawson, Marion, "Methods of Measuring the Demand for and

Value of Outdoor Recreations," Reprint no. 10, Resources

for the Future, Washington, D.C., 1959.

Davis, Robert, The Value of Outdoor Recreation: An Economic

Study of the Maine Woods, doctoral dissertation in

economics, Harvard University, 1963.

Devine, D. Grant, and Bruce Marion, "The Influence of Consumer

Price Information on Retail Pricing and Consumer

Behavior, American Journal of Agricultural Economics, May

1979, 61, 228-37.

Environmental Protection Agency, Environmental Investments:

The Cost of a Clean Environment, Report no.

EPA-230-12-90-084, 1990.

Hammack, Judd, and Gardner Brown, Waterfowl and Wetlands:

Toward Bioeconomic Analysis. Baltimore: Johns Hopkins

University Press, 1974.

Hanemann, W. Michael, "Willingness to Pay and Willingness to

Accept: How Much Can They Differ?," American Economic

Review, June 1991, 81,635-47.

Hanemann, W. Michael, "Preface: Notes on the History of

Environmental Valuation in the U.S." In Navrud, Stale,

ed., Pricing the Environment: The European Experience.

London: Oxford University Press, 1992, 9-35.

Hazilla, Michael, and Raymond Kopp, "Social Cost of

Environmental Quality Regulations: A General Equilibrium

Analysis," Journal of Political Economy, August 1990, 98,

853-73.

Hopkins, Thomas, "The Costs of Federal Regulation," Journal

of Regulation and Social Costs, March 1992, 2, 5-31.

Jorgenson, Dale, and Peter Wilcoxen, "Environmental Regulation

and U.S. Economic Growth," RAND Journal of Economics,

Summer 1990, 21,314-40.

Krupnick, Alan, and Maureen Cropper, "The Effect of

Information on Health Risk Valuation," Journal of Risk

and Uncertainty, February 1992, 2, 29-48.

Krutilla, John, "Conservation Reconsidered," American Economic

Review, September 1967, 56, 777-86.

Mitchell, Robert, and Richard Carson, Using Surveys to Value

Public Goods: The Contingent Valuation Method.

Washington, D.C.: Resources for the Future, 1989.

Portney, Paul, Public Policies for Environmental Protection.

Washington, D.C.: Resources for the Future, 1990.

Randall, Alan, Berry Ives, and Clyde Eastman, "Bidding Games

for Valuation of Aesthetic Environmental Improvements,"

Journal of Environmental Economics and Management, 1974,

1, 132-49.

Ridker, Ronald, The Economic Cost of Air Pollution. New York:

Praeger, 1967.

~~~~~~~~

By Paul R. Portney

Paul Portney is Vice President and Senior Fellow at Resources for the

Future, Washington, D.C.

-------------------

Economic Association and its content may not be copied or emailed to

multiple sites or posted to a listserv without the copyright holder's

express written permission. However, users may print, download, or email

articles for individual use.

Source: Journal of Economic Perspectives, Fall94, Vol. 8 Issue 4, p3, 15p.

Item Number: 9501060640

[Back]