Question

Evaluate the environmental costs associated with a project that will construct a hydro-electric dam in Tasmania and which results in the flooding of a large area of old-growth forest. Describe the valuation techniques that you might employ in this situation and explain what types of values they can elicit? Describe the problems associated with the methods chose as well as their possible advantages over other methodologies.

Answer 1

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.