Economics

# Stated Preference Technique

May 7, 2012, 6:52 pm
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Cost-benefit analyses for the large-scale projects to mitigate climate change may require assessment of goods or services for which market data is unavailable. How does one put a price tag on the Sydney Opera House or the temple at Abu Simbel, structures that are national treasures? On what basis did someone select a few archeological sites for relocation out of the thousands flooded by the Aswan and Three Gorges Dams? Analysts and planners estimate the value of non-marketed goods or services based on either revealed preference or stated preference techniques. [1]

Stated Preference Technique

Stated preference techniques depend on constructed markets developed from interviews or surveys. These interviews or surveys ask people about the economic values they attach to environmental goods and services. [2] Based on the responses, analysts and planners estimate people’s willingness to pay for a particular benefit or their willingness to accept payment for bearing a particular loss. Stated preference techniques can estimate non-use values, values that people derive from something independent of whether they ever use it. Designs of stated preference surveys follow two styles: contingent valuation and choice modeling (Figure 10.18).

• Contingent valuation broadly examines the nonmarket good or service. Analysts and planners limit the choices of the interviewee to primarily one option, asking questions such as “What are you willing to pay to insure that the Grand Canyon is left in its current state for another year?” or “Are you willing to pay $5 to insure that the Grand Canyon is left in its current state for another year?” “If yes, how about$10?” “If no, how about \$1?” Other questions address whether the interviewee has visited the Grand Canyon recently or intends to visit it in the near future and whether these visits or other reasons influence the respondent’s willingness to pay.

• Choice modeling surveys people’s rankings and ratings of alternative characteristics or attributes of a non-market good or service. This technique assumes that the entire worth of the good or service equals the sum of its parts and it is less reliable when the rankings of different characteristics are strongly correlated. Various forms of choice modeling are choice experiments, contingent ranking, contingent rating, and paired comparisons. [3]

Choice experiments present a baseline scenario corresponding to the status quo and several alternative options and ask a respondent to choose among them. (“Choose A, B, or neither, where the choice of ‘neither’ maintains the status quo.”).

Contingent ranking proceeds in the same way but asks a respondent to rank alternatives in terms of desirability.

Contingent rating asks a respondent to rate each alternative on a scale, for example, from 1 to 10.

Pairwise comparisons ask a respondent to indicate strength of preference for one alternative over another. Surveys consistently show that indirect factors can influence people’s preferences about environmental issues. [4] There are endowment effects (people value things they already possess more than those they will acquire), the scope issue (people value the parts more than the whole), loss aversion (people are more averse to suffering a loss than they favor receiving an equal gain), and hyperbolic discounting (people favor short-term payoffs over long-term ones and expect a higher interest rate for short term loans than for long-term loans). These tendencies may distort evaluations of environmental goods or services. [5]

[1] Pearce, D. and E. Özdemiroglu (2002) Economic Valuation with Stated Preference Techniques: Summary Guide, Department for Transport, Local Government and the Regions, London, http://www.communities.gov.uk/documents/corporate/pdf/146871.pdf.

[2] Pearce, D. and E. Özdemiroglu (2002) Economic Valuation with Stated Preference Techniques: Summary Guide, Department for Transport, Local Government and the Regions, London, http://www.communities.gov.uk/documents/corporate/pdf/146871.pdf.

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[4] Gowdy, J. and J. D. Erickson (2005) The approach of ecological economics. Cambridge Journal of Economics 29:207-222 doi:10.1093/cje/bei033.

[5] Getzner, M., C. L. Spash, and S. Stagl (2005) Alternatives for Environmental Valuation, Routledge explorations in environmental economics ; 4. Routledge, London, http://www.netLibrary.com/urlapi.asp?action=summary&v=1&bookid=115117. and Gowdy, J. and J. D. Erickson (2005) The approach of ecological economics. Cambridge Journal of Economics 29:207-222 doi:10.1093/cje/bei033.

This is an excerpt from the book Global Climate Change: Convergence of Disciplines by Dr. Arnold J. Bloom and taken from UCVerse of the University of California.

©2010 Sinauer Associates and UC Regents

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