Contingent valuation

Contingent valuation
See also
Willingness to pay Comparative analysis Statistical methods Automated valuation model Total cost of ownership (TCO) Statistical population Economic impact analysis Praxeology Measurement method

Contingent valuation is a survey-based method that can be used to determine the economic value of a good or service, when traditional market prices do not exist. It is based on the concept that individuals are willing to pay for a good or service, based on the amount of utility it provides to them. This method is often used to measure the value of public goods, such as environmental services, that lack a market price.

The process of contingent valuation involves asking survey respondents a hypothetical questions about how much they are willing to pay (WTP) for a certain good or service. Respondents are asked to answer how much they would be willing to pay for a good or service, even if they didn't have to, given certain information about the good or service. This information can include the amount of the good or service in question, the characteristics of the good or service, and the expected benefits that the good or service would provide.

The results of the survey can be used to determine the economic value of the good or service. This value can be determined in two ways. First, the average WTP from all respondents can be used to calculate an average value for the good or service. Second, the distribution of WTP responses can be used to calculate a range of potential values for the good or service.

Example of Contingent valuation

The following example illustrates how contingent valuation is used to determine the economic value of a good or service. Suppose a local government is interested in determining the economic value of a new park. To do this, the government conducts a survey and asks respondents how much they would be willing to pay for the park. This survey includes information about the size and features of the park, expected benefits of the park, and potential uses for the park.

The results of the survey can be used to calculate the economic value of the park. The average WTP from all respondents can be used to calculate an average value for the park. Additionally, the distribution of WTP responses can be used to calculate a range of potential values for the park. This information can then be used by the local government to make informed decisions about the park and its budget.

Formula of Contingent valuation

The formula for contingent valuation is as follows: Failed to parse (syntax error): {\displaystyle \begin{equation*} Economic\ Value = \frac{Total\ WTP}{Total\ Number\ of\ Respondents} \end{equation*}}

Where Total WTP is the sum of all respondent's WTP responses and Total Number of Respondents is the total number of respondents to the survey. This formula can be used to calculate the average economic value of a good or service based on the survey results.

When to use Contingent valuation

Contingent valuation is often used when the good or service being valued does not have a market price, such as environmental services. It can also be used for goods or services for which there are no current market prices, such as a new product or service, or for goods or services that have not been traded in the past, such as a natural resource. This method can also be used to measure the value of goods or services that may not have a readily available market, such as a public good.

Contingent valuation can also be used to estimate the economic value of goods or services that are difficult to value in a traditional market setting, such as non-market goods or services. This method can be used when traditional market prices are not available, or when market prices do not reflect the true economic value of the goods or services being valued.

Types of Contingent valuation

There are two main types of contingent valuation: open-ended and close-ended.

• Open-ended questions allow respondents to answer with any WTP amount. This type of question is often used to determine the median value for a good or service.
• Close-ended questions provide a range of WTP amounts that respondents can choose from. This type of question is often used to determine the range of potential values for a good or service.

In addition, contingent valuation can also be used to determine the value of a good or service over time. This type of valuation is known as dynamic contingent valuation, and it involves asking respondents how much they would be willing to pay for a good or service at different points in time. This type of valuation is useful for determining the value of a good or service when the amount of the good or service changes over time.

Steps of Contingent valuation

The process of contingent valuation involves four main steps, which are:

• Step 1: Identification and definition of the good or service: The first step of contingent valuation is to identify and define the good or service that is being valued. This includes defining the characteristics of the good or service, such as its quantity, quality, and expected benefits it would provide.
• Step 2: Development of the survey instrument: The second step is to develop the survey instrument that will be used to collect data from respondents. This includes designing the questions that will be asked and the response format that will be used.
• Step 3: Administration of the survey: The third step is to administer the survey to the target population. This can be done through face-to-face interviews, mail surveys, or online surveys.
• Step 4: Analysis of the survey results: The fourth step is to analyze the survey results. This includes calculating the average WTP and the range of potential values for the good or service.

Advantages of Contingent valuation

Contingent valuation has several advantages when used to determine the economic value of a good or service. First, it is relatively easy to implement and can be done at scale. Second, it allows for the inclusion of subjective, non-market factors such as the environment, public safety, and other intangible factors into the valuation process. Third, this method is based on individuals' WTP, which is more reliable than relying on estimated market prices. Fourth, contingent valuation is less expensive than other methods of economic valuation, such as cost-benefit analysis.

In addition, the results of a contingent valuation survey can be used to inform policy decisions and resource allocation. This method can provide a reliable estimate of the economic value of a good or service, which can help decision makers to make informed choices about how to use resources efficiently.

Limitations of Contingent valuation

The contingent valuation method is subject to certain limitations. The most significant limitation is that the survey responses may not be accurate or reliable, as respondents may not be aware of the true value of the good or service. Additionally, respondents may not provide accurate answers due to a number of factors, such as lack of knowledge, familiarity, or interest. Another limitation is that it is difficult to capture the full range of benefits associated with a good or service in a survey. Lastly, the responses to the survey may not be reflective of the preferences of the entire population.

Other approaches related to Contingent valuation

There are several other approaches related to contingent valuation that can be used to measure the value of a good or service. These include the hedonic pricing method, the cost of travel time method, and the cost of illness method.

The hedonic pricing method is used to assess the value of goods or services based on the individual characteristics that the goods or services provide. This method is often used to measure the value of environmental services, such as clean air or clean water.

The cost of travel time method is used to assess the value of time saved from a given good or service. This method assesses the value of time saved from commuting, shopping, or other activities.

The cost of illness method is used to measure the economic value of a good or service by assessing the economic impact of illnesses or injuries that would be avoided by the good or service in question.

In summary, there are several other approaches related to contingent valuation that can be used to measure the value of a good or service. These include the hedonic pricing method, the cost of travel time method, and the cost of illness method.

Suggested literature

• Carson, R. T., & Hanemann, W. M. (2005). Contingent valuation. Handbook of environmental economics, 2, 821-936.
• Carson, R. T., Flores, N. E., & Meade, N. F. (2001). Contingent valuation: controversies and evidence. Environmental and resource economics, 19, 173-210.
• Hanemann, W. M. (1994). Valuing the environment through contingent valuation. Journal of economic perspectives, 8(4), 19-43.