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Chapter 14 - 17 answers
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Book Cost-Benefit Analysis concepts and practices 4rd edition ISBN: 978-0-13-231148-9
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1Answers to Exercises for Chapter 14
11. The construction of a dam that would provide hydroelectric power would result in the
loss of two streams: one that is now used for sport fishing; and another that does not
support game fish but is part of a wilderness area.
a. Imagine that a contingent valuation method is used to estimate the social cost of
the loss of each of these streams. Would you be equally confident in the two sets
of estimates?
b. Consider two general approaches to asking contingent valuation questions about
the streams. The first approach attempts to elicit how much compensation people
would require to give up the streams. The second approach attempts to elicit how
much people would be willing to pay to keep the streams. Which approach would
you recommend? Why?
1.a. As noted in the chapter, CV studies of use goods appear to give answers generally
consistent with methods based on observed behaviors. CV studies of non-use goods have not
been validated through comparisons with behavioral methods because the latter are not available.
Furthermore, they are especially prone to the many of the CV biases discussed in the text.
Consequently, one would likely place more confidence in valuations of use than non-use. In this
context, one would likely be more confident in the CV estimate of the value of sport fishing on
the first stream than CV estimates of the existence value of either of the two streams.
1.b. If either WTA or WTP could be estimated by CV methods with the same degree of
confidence, then the first approach would be the most appropriate because it corresponds exactly
to the project under consideration. However, most experts believe that WTP estimates are so
much more reliable than WTA estimates that the former should always be used, even in a case
like this where WTA is conceptually more appropriate. See, for example, National Oceanic and
Atmospheric Administration, "Report of the NOAA Panel on Contingent Valuation," Federal
Register, 58, no. 10, (1993), pp. 4602-4614.
2. A number of residents of Dullsville have complained to the mayor that the center of
town looks shabby compared to the centers of many other nearby towns. At the mayor’s
request, the Parks Department has put together a proposal for converting the town square
parking lot into a sitting park with flower displays—it modeled the design on a similar
park in the neighboring town of Flowerville. The annualized cost of installing and
maintaining the park, and relocating parking to nearby Short Street, would be about
$120,000. With about 40,000 households paying property taxes, the project would cost an
average household about $3 per year.
You have been asked to give advice about conducting a survey to measure the
benefits of the project.
a. The Parks Department proposes conducting a telephone survey. Does this seem
like an appropriate survey vehicle?
b. How might a random sample be drawn for a telephone survey?
c. Write a statement that could be read by the interviewer to describe the project.
d. Write questions to implement the open-ended WTP method.
e. Propose a procedure for implementing the dichotomous choice method.
, 2
2.a. As the project and the questions that need to be asked to value it are relatively
simple, a telephone survey is a reasonable approach. It is likely to be much less expensive than
personal interviews and likely to have a higher response rate than would be obtained from a mail
survey.
2.b. One commonly used procedure is to generate random numbers between "0000" and
"9999" to be used with the telephone exchange for the town. A personal computer could be used
to generate a list of telephone numbers that match the random numbers and check to eliminate
duplicate numbers. Callers could then try numbers on the list until the target sample size is
obtained.
If the exchange extends beyond the town, then a screening question would be asked
initially to see if the respondent lived within the town -- assuming only town residents are given
standing. If standing is not limited to town residents, then telephone exchanges covering an area
in which people could reasonably be expected to care about the project should be the basis for
sampling.
2.c. An appropriate statement would fully describe the project, how it will be funded, and
whether the respondent is answering as an individual or as the representative of a household. For
example:
THE TOWN OF DULLSVILLE IS CURRENTLY CONSIDERING REPLACING THE
PARKING LOT IN THE TOWN SQUARE WITH A SITTING PARK. THE PARK, SIMILAR
TO THE ONE IN THE CENTRAL SQUARE OF FLOWERVILLE, WOULD INCLUDE
DISPLAYS OF ANNUAL FLOWERS. THE DISPLACED PARKING SPACES WOULD BE
RELOCATED TO NEARBY SHORT STREET. THE COSTS OF INSTALLING AND
MAINTAINING THE PARK AND RELOCATING PARKING WOULD BE PAID FOR
THROUGH THE TOWN'S PROPERTY TAX. IF YOU ARE A RENTER, YOU SHOULD
ASSUME THAT THE TAXES WOULD BE PASSED ALONG TO YOU IN YOUR RENT.
TO HELP THE TOWN DETERMINE THE DESIRABILITY OF THE PARK, PLEASE
ANSWER THE FOLLOWING QUESTIONS. YOUR ANSWERS SHOULD BE FOR YOU
PERSONALLY AND NOT INCORPORATE THE VIEWS OF OTHER MEMBERS OF YOUR
HOUSEHOLD.
Respondents might be asked if they are familiar with the Flowerville Park. If they are not, then
more description of the proposed park might be given.
2.d. The open-ended question could be quite simple, though it may be best to phrase it
slightly differently for homeowners and renters.
Version for property owners:
WHAT IS THE MAXIMUM AMOUNT THAT YOU WOULD BE WILLING TO PAY EACH
YEAR IN HIGHER PROPERTY TAXES TO HAVE THE PARK INSTALLED AND
MAINTAINED?
, 3
Version for renters:
WHAT IS THE MAXIMUM AMOUNT THAT YOU WOULD BE WILLING TO PAY EACH
YEAR IN HIGHER RENT TO HAVE THE PARK INSTALLED AND MAINTAINED?
2.e. The first question that must be answered concerns the prices that are to be offered.
As you know that the annual cost would be roughly $3 per household per year, you would
probably want to pick your spread of prices around this amount. As some people may view the
new parking as less desirable than the old parking, you should probably include some negative
prices as well as positive prices. Perhaps equally spaced prices from negative $5 to positive $25
would be a reasonable range for a project such as this.
The second question is randomization. In this case, because the telephone randomization
is likely to be quite effective, the main concern is to insure that there are no systematic
differences due to the telephone interviewers. Therefore, you would probably want to give each
interviewer equal numbers of the different prices. If you were concerned about changes in the
interviewers skill or attention over the course of the survey, then you could give them the set of
different prices in random order.
3. Consider a project that would involve purchasing marginal farmland that would then be
allowed to return to wetlands capable of supporting migrant birds. Researchers designed a
survey to implement the dichotomous choice method. They reported the following data:
Stated Price Fraction of
(annual payment Respondents
in dollars) Accepting Stated
Price (percent)
0 98
5 91
10 82
15 66
20 48
25 32
30 20
35 12
40 6
45 4
50 2
What is the mean willingness-to-pay for the sampled population?
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