EXISTENCE VALUE

Purpose: To define existence value (as a benefit category) and discuss the theoretical and empirical problems analysts face in using it

ACTIVE AND PASSIVE USE VALUESActive use – person makes some use of the object in question (hiking in the wilderness). Passive use or non-use – person values good not actively used (thinking about existence of wilderness).

Non-use value – people are willing to pay even though they don’t use it.

Active use benefit categories:Exhaustible consumption goods: value is easily determined through markets.Direct consumption of toll goods: consumption is on site and can usually be observed.Indirect consumption of toll goods: consumption is offsite (a book or movie about something) and also may be observable.

Passive use benefit categories:Option value: value to keep open the possibility of use in the future.Pure existence value: good has intrinsic value apart from its use.Altruistic existence value: driven by desire of others to consume the good.Bequest value: altruism is directed toward future generations.

CONTINGENT VALUATION: MEASURING EXISTENCE VALUE

Survey (market) research (SRS) to get people to express their WTP based on all their possible motivations for valuing policy changes.

This approach depends on the analyst’s ability to frame correct questions, and requires the analyst to convey a full description of the policy in question.

Altruistic existence valuesPose special problems. An individual’s own consumption, cost and benefits can be estimated separately and then added together to obtain net benefits.Altruistic values, however, may depend on the distribution of costs and benefits: who will use the good and who bears cost of maintaining it?

Instrument Design 1SRS representing everyone with standingAs WTP of use and non-use values are sensitive to the order in which they are valued, use values should be discovered before non-use values, or else non-use will be overestimated. Non-use values are also sensitive to geographic areas (i.e., higher existence values for assets in close proximity). The extrapolation of samples over a large geographic area is controversial.

Instrument Design 2

• If respondents are informed of all sources of uncertainty relevant to the valuation of the policy change, then WTP becomes an option price. Ergo, no adjustment for uncertainty is required..

Example: Mono Lake

The State of California Water Resources Control Board had to decide how much water to allocate to Los Angeles from sources flowing into Mono Lake.  The reduced water flows to the lake were affecting food supplies for nesting and migratory birds.

Mono Lake

Preliminary SurveyCalifornia households were asked in a mail survey, whether they would

pay more on their water bill for higher cost replacement water supplies, so that natural flows could once again go into Mono Lake. They were told that, according to biologists, the higher flows to the lake were needed to maintain food supplies for nesting and migratory birds.

The average willingness to pay per household was estimated to be $13 per month, or $156 per year. When multiplied by the number of households in California, the total benefits exceeded the $26 million cost of replacing the water supply by a factor of 50.  One impact of the survey results was to change the nature of the debate over Mono Lake from "fish or people" to one that recognized that people care about fish and birds, as well as about inexpensive water supplies for Los Angeles.  

Follow-up SurveyThis new survey was conducted over the telephone, with people who had been mailed information booklets with maps and photo-simulations showing what the lake would look like at alternative water levels.  It also gave detailed information about effects of changing lake levels on different bird species.  Survey respondents were asked how they would vote in a hypothetical referendum regarding Mono Lake.

ResultsSurvey showed that the benefits of a

moderately high (but not the highest) lake level were greater than the costs. 

The California Water Resources Control Board did reduce Los Angeles’ water rights by half, from 100,000 acre feet to about 50,000 acre feet, to allow more flows into Mono Lake.

Example: Salmon recoveryThe Elwha and Glines dams on the Elwha River on the

Olympic Peninsula in Washington are very old and have no fish ladders. They block migration of fish to 70 miles of pristine spawning grounds in Olympic National Park.

It is estimated that their removal would more than triple salmon populations on the Elwha River.

However, the cost to remove the dams and the 50 years of sediment build-up behind them was estimated to be in the neighborhood of $100-$125 million.

Application

Households in Washington and elsewhere were asked if they would vote in favor of removing the dams and restoring the river, in order to triple salmon  populations at an annual cost that varied across households. 

Results

The estimated economic values per household ranged from $73 for Washington households to $68 for the rest of the U.S. households.  Using these results, the economic value to Washington residents alone would justify removing the dams and restoring the river. If one applied the average willingness to pay per household to the remaining 86 million households in the rest of the U.S., net benefits were in excess of $1 billion

Elwha Dam removal

Cost-Benefit Analyses of Spotted Owl Protection

Hagen, Vincent, & Welle:total costs and CV

benefitsRubin, Helfand, & Loomis:

total costs and CV benefitsMontgomery, Brown, & Adams:

marginal costs

Benefit: Average Annual Willingness to Pay (WTP)Contingent Valuation Method

Hagen, Vincent, & WelleNumber of households Total WTP

Per household (millions) (millions $)High $144.28 96 $13,850.88Medium 86.32 96 8,286.72 Low 47.93 96 4,601.28

Rubin, Helfand, & LoomisNumber of households Total WTP

Per household (millions) (millions $)WA $34.84 1.801 62.75 OR 34.84 1.085 37.80 CA -10% 31.36 10.722 336.20 Rest of US -29% 24.74 75.871 1,876.78

Total US 89.479 2,313.52

Final Cost-Benefit Models

Montgomery Expected BenefitIn millions dollars Total Cost TB x p(S) Net Benefit

Comparing to the CV study of Rubin (TB=$38,106)

Probability: 95% 46,000.00 30,215.70 (15,784.30) Probability: 91% 33,000.00 28,943.46 (4,056.54) Probability: 82% 21,000.00 26,080.92 5,080.92

Comparing to the CV study of Hagen (TB=$98,846)

Probability: 95% 46,000.00 93,903.70 47,903.70 Probability: 91% 33,000.00 89,949.86 56,949.86 Probability: 82% 21,000.00 81,053.72 60,053.72

SHOULD EXISTENCE VALUE BE INCLUDED IN CBA?

Existence values for unique and long-lived assets should be estimated whenever possible. When existence values can’t be measured, the analyst should discuss their possible significance on the sign of net benefits.Costs and benefits should be presented with and without their inclusion to make clear how they affect net benefits.

Some Difficulties with Contingent Valuation

Sample size and selection bias

Self-reporting and strategic bias

Question specification bias (“priming”)

Embedding or part-whole biasDoes $27 + $48 = $75 ? --Probably not!

Interpreting nonresponse and protest answers

Arrow-Solow Panel Recommendations (1993)

1. Personal interviews are preferred.2. Ask WTP to prevent future incident rather than WTA

for damages from incident that already occurred.3. Use referendum format.4. Begin with a scenario.5. Remind people that a WTP would reduce the money

they have available to spend on other things.6. Remind people of substitutes for the commodity in

question.7. Include follow-up questions to verify understanding.