Valuation 6: CVM continued Valuation of non-use values The Exxon Valdez oil spill An application to waterfowl Embedding and possible causes Warm-glow and.

Valuation 6: CVM continued

• Valuation of non-use values• The Exxon Valdez oil spill• An application to waterfowl• Embedding and possible causes• Warm-glow and its effect on donations

to public goods• The NOAA guidelines• The EU environmental liability directive

Last week we looked at

• Direct and indirect valuation methods

• Total economic value revised• The contingent valuation method,

and its many potential biases• Among them the

part-whole/embedding problem - suggesting that people do not answer what it is being asked

WTP for conservation of the Apollo (Parnassius apollo)

• Found on mountains in Europe usually above 1000m up to 2000m• On the IUCN Red List of threatened

species• Due to changes/degradation of their

habitat with less food available for the caterpillars

WTP for the Apollo (2)

• Suppose a fund is set up to pay for a perpetual conservation of this species

• Every hectare of protected land has a probability of 30% that the species will survive there over the next 50 years

• A hectare of protected land costs EUR 1000 to purchase and EUR 50 per year to manage the conservation

• What are you willing to pay per year to donate to the fund?

WTP for conservation

• What about all the other endangered species including mammals, birds, insects etc.?

• The 2004 IUCN Red List contains 15,589 species threatened with extinction

• Focusing on a number of „flagship“ species might translate into funding for their natural habitat and provide much broader conservation benefits– E.g. giant panda, elephant, lion, tiger

• Otherwise, society might be willing to support a „flagship“ species alone

Ex-ante and ex-post measurements of non-use

values

• The ex-ante use of preference based values for the determination of benefits is valuable for policy makers

• Is it equally valuable to use this method ex-post for the measurement of damages?

The Exxon Valdez oil spill

• The oil tanker departed the Valdez oil terminal, Alaska on March 23, 1989 with 53 mio. gallons of crude oil

• The ship manoeuvred out of the shipping lane to avoid icebergs but failed to return to the lanes and struck a reef

• The accident resulted in a discharge of about 11 mio. gallons of oil into Prince William Sound

Exxon Valdez oil spill (2)• Environmental Impact

– Thousands of animals died– Due to thorough cleanup little visual

evidence but reductions in some animal populations can still be observed

• Litigation– The damage was estimated to lie between

US$3 and $15 billion– Exxon settled for US$ 1 billion in natural

resource damages and restitution for injuries

– In addition, Exxon spent over US$ 2 billion on oil spill response and restoration

Waterfowl - Survey

• Study: Bill Desvouges and colleagues, 1993• Context: Exxon Valdez oil spill• Funding: Exxon Corp.• Mall survey, developed using focus groups,

one-on-one pretests, and two mall pretests• Two shopping malls in Atlanta, Georgia,

outside the Central Flyway• 10-12 minutes• 1205 completed questionnaires

Waterfowl – Survey -2• Q1 How often in the past 6 months have you

heard about issues involving migratory waterfowl (select number: 1 (none) … 5(seven or more

times))

• Q2 Is protecting waterfowl important to you (if yes select reasons)

• Show way of Central Flyway; second highest number of migratory waterfowl, 8.5 million a year

• Q3 How would you rate your knowledge (low, mid, high) of threats to the waterfowl in the central flyway (oil spills, waste oil holding ponds, wetlands destruction, herbicides and pesticides)

Waterfowl – Survey -3• Describe waste-oil holding ponds

• In 1989, N ducks died there. This is x% of the 8.5 million migratory waterfowl

• Ponds could be covered by nets, Federal Government considers this, Fish and Wildlife Service would monitor and enforce

• Q4 Think about your income, expenses, alternatives. What is the most that your household would agree to pay each year in higher prices for wire-net covers to prevent about N migratory waterfowl from dying each year in waste-oil holding ponds in the Central Flyway?

Waterfowl – Survey -4

• Q5 Is the amount greater than zero. If yes, select most important reason

• Q6 If no, select most important reason

• Q7 Indicate agreement to statements

• Q8 Ditto for waterfowl

• Q9 Activities

• Q10 Age; Q11 Education; Q12 Sex; Q13 Race; Q14 Income; Q15 Household size; Q16 Membership

Waterfowl – Results• 398 answered for N=2,000; 408 for N=20,000;

399 for N=200,000

• Excluded 29%: as outliers (3%), protest bids (8%), unlikely (1%) and rubbish (17%)

• WTP (2,000) = $59 16 /household/year• WTP (20,000) = $59 10 /household/year• WTP (200,000) = $71 15 /household/year

• Not significantly different!

Waterfowl – Reasons• Desvousges et al. „we find that CV yields

estimates that fail to meet several basic criteria for accuracy“

• Diamond and Hausman „responses to CV questions are not consistent with the basic economic theory of choice“– “Is some number better than no number?”

• People cannot count• People do not listen• People realised that 2,000 or 200,000 ducks is

small compared to 8.5 million• Embedding and warm glow

Embedding• WTP for same good varies depending on

whether it is assessed on its one or embedded as part of a more inclusive package

• Kahnemann (1986) – increased taxes to prevent drop in fish

population in all Ontario lakes/smaller area

• scope effect• sub-additivity effect• Possible explanations

– Substitution and satiation– Purchase of moral satisfaction

Some Puzzles

• In a large economy, no one should contribute to public goods like the Red Cross, the Salvation Army, Greenpeace – yet they do

• Government support should crowd out charitable donations – but it does not

• This suggests that people donate to public goods for other reasons than pure altruism – social pressure, guilt, sympathy or warm glow may explain this

Warm Glow• Consider

• For a given wealth wi the agent derives utility from private consumption xi, from donating gi

and from the public good G

• Notice that gi enters the function twice

• Three casesPurely altruistic:

Purely egoistic:

Impurely altruistic:

, ,

1

max ( , , )

s.t. ;

i ii i i

x g G

n

i i i ii

U x G g

x g w G g

( , , ) i i i iU U x G g

( , ) i i iU U x G

( , ) i i i iU U x g

Warm Glow (2)

can be rewritten as

The maximisation problem is then equivalent to

Differentiating with respect to G and solving yields

max ( , , )i i i i i

i i i iG

x w g g G G

U w G G G G G

( , ) or ( , )i i i i i i i i i iG f w G G g f w G G G

1

n

iiG g

i i i ig G G g G G

Warm Glow (3)• The donations function

• The marginal propensity to donate is

• The marginal propensity to donate for altruistic reasons is

• The marginal propensity to donate for egoistic reasons is

( , )i i i i

egoisticaltruistic

G f w G G

( , ) ( )ia i i i i i iff w G G w G

( , )ie i i i i iff w G G G

ia ieiGff f

Warm Glow (4)• The marginal propensity to donate is

• What is the sign of fie?

• If we cut G-i by $1 and increase wi by $1 the first argument of fi() remains unchanged

• As wi=xi+gi the actor would spend some money on xi and some on G so that G would fall

• If we cut wi by a tax of $1 and increase G-i by $1 G would increase

• Warm glow leads to higher donations• Warm glow leads to embedding

ia ieiGff f

NOAA guidelines from 1993

• A panel of experts provided advice to the National Oceanic and Atmospheric Administration on the question – “ is the CVM capable of providing estimates of lost non-use

or existence values that are reliable enough to be used in the natural damage assessment?”

• Conclusion: Yes, if…• The six most important guideline: CV experiments

should – rely on face-to-face interviews– elicit the respondent’s WTP rather than WTA– use dichotomous choice referendum elicitation format– contain an accurate and understandable description of the

programme or policy– include reminders of the substitutes for the commodity in

question– include a follow-up section at the end to be sure the if the

respondent understood the choice

Environmental Liability in the EU

• There is very limited provision for assessment of environmental damage

• Most legislation in member states uses “traditional” legal forms rather than environmental damages per se– Personal injury or property damage

• The EU Environmental Liability Directive fills this legislative gap and broadens the notion of damages to cover direct or indirect damage to the aquatic environment, to species and natural habitat or contamination of the land– Deadline for transposition in the Member States was

30.4.2007

The EU Environmental Liability Directive

In addition to primary remedial measures:• The use of resource-to-resource or service-to-

service equivalence approaches shall be considered first– Provide natural resources and/or services of the

same type, quality and quantity– Where this is not possible, alternative resource

and/or services shall be provided (reduction in quality can be offset by increase in quantity)

• If this is not possible, alternative valuation techniques shall be used– The authority prescribes the method

Implications• Applied at reasonable cost?• Who should be counted as part of the

affected population?– Summing over population can produce

enormous estimates

• Sufficiently accurate for use in court? – Small errors can make significant differences

Contingent valuation studies are easy to do, but hard to do really well