Question

Discuss the four major formats or approaches to Contingent Valuation Method (CVM) highlighting some of the inherent weaknesses in the approach. What are the various ways in which CVM data can be converted into a more informative Willingness-to-Pay Estimate?

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 marketplae in which no actual transactions are made,contingent valuation has sucessfully used for commodities that are not exchanged in regular markets, or when it is difficult to observe market transactions under the desired conditions.

Four major approaches to Contingent Valuation Method are:

1. WTP and WTA: the goal of contingent valuation is to measure the compensating or equivalent variation for the good in question. we need to calculate the what amount a consumer is willing to pay for a good and what a seller is willing to recieve for the good to give it up. WTP is defined as the amount that must be taken away from a person's income while keeping his utility constant. V(y-WTP,p.q₁; Z) = V(y,p.q₀; z), where V represents the the indirect utility function, y is the income, p is avector of prices faced by the individual, and q₀ and q₁ are the alternative levels of good or quality indexes with q₁ > q_{0 .} willingness to accept for a good is defined as the amount of money that must be given to an individual to keep his utility even by giving up the good. V(y+WTA,p.q₀; Z) = V(y,p.q₁; z). in the first and the second equation utility is allowed to depend on avector of individual characteristics influencing the trade-off that the individual is prepared to make between income and the good. an important consequence of equations 1 and 2 is that WTP or WTA should depend on:

• initial and final level of the goods in question (q₀ and q₁)
• respondent income
• all prices faced by the respondent, including those of substitute goods

2. survey methods: as explained earlier, the contingent valuation method (CVM) relies directly querying individuals about their WTP and WTA for a good. this can be done through various methods of survey like in person interviews to produce the highest quality result, mail surveys can be undertaken, some studies have been conducted using convenienc samples drawn from University staff, college students, and by intercepting passers by at shopping malls.

3. Questionnaire: questionnaire is also one of the method of surveys. most contingent valuation surveys open with general questions aimed at making the respondent comfortable with participating in the survey and answering questions. this is usually followed with a depecting a plan for the provisions of a public good, a change in environmental quality, or a change in the private commodity to be valued . it comprises a set of questions with specific set of answer choices.

4. WTP elicitation techniques: in early applications of the CVM, respondents were often asked open ended questions about their WTP. questions like what is the most you are willimg to pay for...? and it is intended to elicit a point of estimate of the respondent's WTP. this approach is frequently less used now a days due to obvious respondent difficulty in answering the payment question, which results in many missing values for WTP.

the various ways in which CVM data can be converted into more informative WTP estimate are as follows:

• using larger sample to have more contingency situations under control
• using statistical tools to interpret the various data collected
• using the equations of WTP and WTA analysis for more accurate results.