Question & Answer: Identify and explain three different issues that threaten the validity of contingent valu- ation studies. Why do we use contingent v…..

Contingen Valuation is a method of valuation which is driven by the willingness of people. As the name suggests it is contingent upon the method by which a person gives values to commodities or goods. The valuation considers the willingness to pay (WTP) of a person or willing to receive (WTR) of a person with respect to a particular good. This method of valuaton does not give consideration to the factors of the market behaviour. It is a survey-based economic valuation system which is used for valuating the non-market resources.

Theses are the threats to the valuation system.

1. Strategic Decision – The valuation system is based upon the willingness to pay or receive a good by a person. This valuation will be deterred by various emotional reasons as well as valuation preferences. The over reliance on a person’s judgement may lead to unfar valuation of goods.

2. Income constarints – The willingness of a person is largely affected by the income reserve. The income constraint may lead to a heavy valuation for the goods which are economically not of the value at which they are quoted. The same income constraint may force the buyer to rely on the valuation made with prejudice over the constraints of the person.

3.

• The expressed answers to a willingness to pay question in a contingent valuation format may be biased because the respondent is actually answering a different question than the surveyor had intended. Rather than expressing value for the good, the respondent might actually be expressing their feelings about the scenario or the valuation exercise itself. For example, respondents may express a positive willingness to pay because they feel good about the act of giving for a social good (referred to as the “warm glow” effect), although they believe that the good itself is unimportant. Respondents may state a positive willingness to pay in order to signal that they place importance on improved environmental quality in general. Alternatively, some respondents may value the good, but state that they are not willing to pay for it, because they are protesting some aspect of the scenario, such as increased taxes or the means of providing the good.

Despite the various threats contingent valuation is applied largely for the environmental valuations. It is beneficial in the manner that it allows the valuation of each and every article or good. The market forces my not be available for things which are not frequent for trade and therefore they lack the market driven valuation. The methid is flexible and not difficult to analyze and understand.