Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Contingent Valuation MethodThe aim of the method is to elicit individual preferences, in monetary terms, for changes in the quantity or quality ofa non-market good or service.The key element in any contingent evaluation study is a properly designed questionnaire. The questionnaire aims todetermine individuals’ estimates of how much having or avoiding the change in question is worth to them.In order to conduct a contingent valuation it is worthwhile:- investigating the attitudes and behaviour related to the goods to be valued in preparation for answering thevaluation question and in order to reveal the most important underlying factors driving respondents’ attitudetowards the public good;- presenting respondents with a contingent scenario providing for a description of the commodity and the termsunder which it is to be hypothetically offered. The final questions should aim to determine how much they wouldvalue the good if confronted with the opportunity to obtain it under the specified terms and conditions;- asking questions about the socio-economic and demographic characteristics of the respondents in order to checkthe extent to which the survey sample is representative of the population involved.At the end of the survey process, analysts use appropriate econometric techniques to derive welfare measures such asmean or median willingness-to-pay and also to identify the most important determinants of willingness-to-pay. Withregard to the statistical indicators to be used, the median could be the best predictor of what the majority of peoplewould actually be willing to pay because, unlike the mean, it does not give much weight to outliersChoice Modelling MethodChoice Modelling is a survey-based method for modelling preferences for goods, when goods are described in termsof their attributes and of the level of these attributes. Respondents have various alternative descriptions of a good,differentiated by their attributes and levels, and are requested to rank the alternatives, to rate them or to choose theirpreferred option. By including price/cost as one of the attributes of the good, willingness-to-pay can be directlyrecovered from people’s rankings, ratings or choices. Also, in this case, the method allows the measurement of nonusevalues.The main variants proposed in specialist literature are described in the following table:Main variants of CM methodTasksChoice experimentsChoose between two or more alternatives (where one is the status quo)Contingent rankingRank a series of alternativesContingent rating Score alternative scenarios on a scale of 1-10Paired comparisonScore pairs of scenarios on a similar scaleThe main strengths of the method are:- the capacity to deal with situations where changes are multi-dimensional, thanks to its ability to separately identifythe value of the specific attributes of a good;- the possibility for respondents to use multiple choices (for example variants in Choice experiments), to expresstheir preference for a valued good over a range of payment amounts;- by relying on ratings, rankings and choices and deriving indirectly the willingness-to-pay of respondents, themethod overcomes some problems associated with the Contingent Valuation Method.The main problems are:- the difficulties respondents experience in dealing with multiple complex choices or rankings;- the inefficiency in deriving values for a sequence of elements implemented by a policy or project. For these typesof evaluations Contingent Methods should be preferred;- the willingness-to-pay estimate is sensitive to study design. For example, the choice of attributes and levels topresent to the respondents and the way in which choices are relayed to respondents (use of photographs, textdescription etc.) may impact on the values of estimates;- one indirect method of evaluating non-market goods is related to dose-response functions.Dose-response functionsThe dose-response technique aims to establish a relationship between environmental impacts (the response) andphysical environmental impacts such as pollution (the dose). The technique is used when the dose-responserelationship between the cause of environmental damage, such as air or water pollution, and the impacts, morbidity225