Question

Compare Contingent Valuation Method (CVM) with the Travel Cost Method (TCM) and discuss the relative strengths and weaknesses for both techniques.

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.

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-use component of value, and when the environmental improvements to be valued are outside of the range of available data.

Advantages of the Contingent Valuation Method:

• Contingent valuation is enormously flexible in that it can be used to estimate the economic value of virtually anything. However, it is best able to estimate values for goods and services that are easily identified and understood by users and that are consumed in discrete units (e.g., user days of recreation), even if there is no observable behavior available to deduce values through other means.
• Though the technique requires competent survey analysts to achieve defensible estimates, the nature of CV studies and the results of CV studies are not difficult to analyze and describe. Dollar values can be presented in terms of a mean or median value per capita or per household, or as an aggregate value for the affected population.

Limitations of the Contingent Valuation Method:

• Although the contingent valuation method has been widely used for the past two decades, there is considerable controversy over whether it adequately measures people's willingness to pay for environmental quality.
• Non-response bias is a concern when sampling respondents, since individuals who do not respond are likely to have, on average, different values than individuals who do respond.
• Estimates of nonuse values are difficult to validate externally.
• When conducted to the exacting standards of the profession, contingent valuation methods can be very expensive and time-consuming, because of the extensive pre-testing and survey work.

The Travel cost method involves collecting data on the costs incurred by each individual in travelling to the recreational site or amenity. This ‘price’ paid by visitors is unique to each individual, and is calculated by summing the travel costs from each individuals original location to the amenity. By aggregating the observed travel costs associated with a number of individuals accessing the amenity a demand curve can be estimated, and as such a price can be obtained for the non-price amenity.

Advantages of the Travel Cost Method:

• The travel cost method closely mimics the more conventional empirical techniques used by economists to estimate economic values based on market prices.
• The method is based on actual behavior, what people actually do, rather than stated willingness to pay, what people say they would do in a hypothetical situation.
• The method is relatively inexpensive to apply.
• On-site surveys provide opportunities for large sample sizes, as visitors tend to be interested in participating.
• The results are relatively easy to interpret and explain.

Limitations of the TCM:-

There are a number of limitations associated with the travel cost method of value estimation. These are as follows:

(1) Difficulties in measuring the cost of visiting a site.:- It may actually be quite difficult to measure the cost of accessing a site or amenity. This is because of the opportunity cost associated with the travel time. If the opportunity cost of all individuals is the same then the estimated price will be accurate. If, however, the opportunity cost of individuals accessing the site varies, which is more likely, then the measure will be inaccurate.

(2) The estimation of willingness to pay used in the TCM is for entire site access rather than specific features.:- As the TCM only provides a price or value relating to the cost of accessing the amenity or recreational site, it does so for the whole site. It may, however, be the case that we wish to value a certain aspect of the site in our project appraisal. For example, we do not wish to value a whole park, but instead the fishing ponds within it.

(3) The exclusion of the marginal cost of other complementary goods:- The travel cost method does not account for the costs involved in purchasing complementary goods which may be required in order to enjoy accessing the amenity. For example, individuals accessing a park area may take a football with them, or a picnic. Alternatively, individuals accessing a recreational site may take walking equipment and tents with them. The marginal costs of using this equipment should be included in the price estimated.

(4) Journey value:- It may be the case that the journey itself has a value to the individual. If this is true then some of the cost incurred in travelling to the amenity should not actually be applied to the individual accessing the amenity, and as such should be removed from the estimation of the amenities value.