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Introduction and General Description of the Method of Contingent Valuation Contingent Valuation is a method of estimating the value that a person places on a good. The approach asks people to directly report their willingness to pay WTP to obtain a specified good, or willingness to accept WTA to give up a good, rather than inferring them from observed behaviours in regular market places.
Because it creates a hypothetical marketplace in which no actual transactions are made, contingent valuation has been successfully used for commodities that are not exchanged in regular markets, or when it is difficult to observe market transactions under the desired conditions.
Although it is certainly possible to employ contingent valuation for commodities available for sale in regular marketplaces, many applications of the method deal with public goods such as improvements in water or air quality, amenities such as national parks, and private non-market commodities such as reductions in the risk of death, days of illness avoided or days spent hunting or fishing.
Contingent valuation has proven particularly useful when implemented alone or jointly with other valuation technique for non-market goods, such as the travel cost method or hedonic approaches. It remains the only technique capable of placing a value on commodities that have a large non-use1 component of value, and when the environmental improvements to be valued are outside of the range of available data.
Much controversy surrounds the use of CV when most of the value of the good derives from passive use, as has been typical in litigation over the damages to natural resources and amenities caused by releases of pollutants. Critics of contingent valuation allege that the quality of stated preference data is inferior to observing revealed preferences, consider contingent valuation a "deeply flawed method" for valuing non-use goods and point at the possible biases affecting contingent valuation data.
Despite these criticisms, CV has formed the basis for a significant amount of policymaking in the United States see Cropper and Alberini,for examples. Based on the results of contingent valuation studies, researchers have been able to predict the number of connections to water supply systems at improved conditions, and the resulting revenue for the local water authority, making it possible to study the feasibility of such improvements and of various financing schemes.
Recent work by the World Bank shows that contingent valuation correctly predicted 91 percent of the actual connections to the piped water system Cropper and Alberini, Our view of the contingent valuation studies conducted in developing countries, which we discuss in this report section II and summarize in the tables in the Appendix, is that most of them have been designed and implemented following rigorous standards in the economics profession.
To elaborate on this point, it appears that the majority of these studies pose willingness-to-pay questions using dichotomous choice approaches, asking the respondents whether or not they would purchase the specified commodity at the stated prices. This approach is nowadays preferred over alternative approaches, because it reduces the cognitive burden placed on the respondent, and mimics the behaviour of people in regular marketplaces.
When follow-up questions were used to obtain more precise information about the respondent's WTP amount, the analysts usually took care to examine whether mean WTP would change with each new round of information as a result of strategic behaviour on the part of respondent.
Researchers involved in applications of CV in developing countries also appear to have tested the survey materials carefully. For instance, undesirable reactions to the use of photographs led Shyamsundar and Kramer to drop visuals aids from their survey, while observing that respondents were reporting WTP out of a sense of coercion led to rephrase their valuation question in favour of eliciting WTA to forgo access to forest areas.
In general, internal validity analyses have found that WTP relates well to the household's economic circumstances and the household's cost of obtaining substitutes for the commodity described in the survey.
For instance, WTP for improved water service is usually higher when the household faces high cost of securing alternative water supplies, and women, who in developing countries are often responsible for obtaining water for their household, have sometimes but not always, probably for cultural reasons reported higher WTP for in-house or public tap connections.
However, CV practitioners conducting studies in developing countries have had to struggle with a variety of problems. To illustrate, in the absence of lists of dwellings and households at the location of interest, samples have sometimes been drawn using ad hoc assumptions.
Coverage of a small geographic area has sometimes resulted in the target community's awareness that a study was being conducted, and in subsequent attempts by community leaders to use their influence to manipulate survey responses in hopes of influencing the provision of the commodity.
Respondents have struggled with the notion of maximum willingness to pay, or have been found to report very low WTP for a commodity e.
This has been attributed to seasonal cash constraints related to the agricultural labour market, and to the fact that under such constraints households are unwilling to commit to regular payments to the water authority.
At many locations in Asia and Africa, respondents distrust the government, which they blame for the current state of disrepair of equipment and facilities, and this is reflected in their low WTP for commodities or services such as regional-level sanitation, water quality programmes and local water supply.
It has also been difficult in some cases to describe the technology that would bring the specified sanitation improvement, and researchers have been forced to craft the CV questionnaire in imaginative ways to get around this problem. Despite these difficulties, we are confident that proper application of contingent valuation can and will provide valuable information to policy-makers and donor agencies seeking to evaluate the benefits of intervention, or the revenues associated with investment in infrastructure.
In the remainder of section I of this report, we present a brief description of the contingent valuation method.Economics Multiple Choice Questions(MCQ) for CBSE Class 10 on TopperLearning.
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