Valuation Techniques for Social Cost-Benefit Analysis: - HM Treasury

al, 1999, p.213). They would have then responded on the basis of their affective valuation of
this image.
ii) Sub-additivity effects
These effects occur when the estimated WTP for one good plus the estimated WTP for another
good is greater than the estimated willingness-to-pay when respondents are asked to value both
goods together (Kahneman and Knetsch, 1992).
iii) Sequencing effects
These effects have been found when more than one good has been valued in a survey and the
estimated value of a good differs according to when in the sequence it is presented to the
respondent. The estimated WTP for a good has been found to fall the later in the sequence that
it is presented (Tolley et al, 1983; Samples and Hollyer, 1990; Barber and ODwean 2008).
Attempts to explain and find solutions to the preference anomalies
It has been argued that insensitivity to scope findings are idiosyncratic and/or that the studies
that have obtained such results are flawed in terms of survey design (Smith, 1992; Carson and
Mitchell, 1993; Smith and Osborne, 1996; Carson, 2001). For example, the finding of
insensitivity to scope should not be surprising if the description presented is not adequate to
enable the respondent to distinguish between the smaller and larger good or if the survey
emphasises they symbolic nature of providing the good. Another potential explanation is that
individuals are running up against a budget constraint, so that they value the larger good more
but they are unable to pay required multiple. However, Loomes (2006) notes that contingent
valuation studies formed with WTA questions have also found insensitivity to scope.
Sequencing effects and sub-additivity effects have also been argued to be explainable with
reference to income and substitution effects (Hoehn and Randall, 1989; Hanemann 1994;
Carson, Flores, and Hanemann, 1998; Carson et al. 2001). Intuitively, each new good obtained
reduces the income available for respondents to spend on other goods. Given this, the later in
the overall package that a good is offered, the less desirable it will look. There may also be a
similar effect if the goods are substitutes for each other.
A number of studies have sought to derive solutions to these preference anomalies and
informational problems for contingent valuation. Two editions of the journal ‗Environmental and
Resources Economics‘ (in 2005 and 2010) are dedicated to methods that have been developed
to deal with preference anomalies in contingent valuation studies. One of the key mechanisms
for anomaly reduction in these studies is through learning by repetition and experience. The
work is based on Plott‘s (1996) Discovered Preference Hypothesis (DPH). DPH argues that stable
and consistent preferences are the product of experience gained through repetition. There are a
number of studies that report reductions in the effects of arbitrary anchors and in the number of
preference reversals as people become familiar with the good and the institutional payment
arrangements in a contingent valuation context (Bateman et al., 2006; Braga and Starmer,
2005) 7 . Bateman et al. (2006) propose a double-bound dichotomous choice payment format 8
for elciting values. This is contrary to the recommendations set out by the National Oceanic and
Atmospheric Administration (NOAA) in 1993 9 . NOAA recommended a single-bound
dichotomous choice format in order to mimic a market setting more closely. To allow for
7
For a review of the literature see Bateman et al. (2006).
8
See Annex A for details of payment formats in contingent valuation.
9
In 1993 NOAA appointed a panel of economic experts to consider recommendations for the use of contingent valuation studies (Arrow et al., 1993).
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