If people merely ‘want’ something, it may not be backed with
a willingness to pay for that service. Hence one needs to ascertain people’s
maximum willingness to pay for service options under consideration. Willingness-To-Pay
(WTP) is the maximum amount an individual is ready to pay for a particular
goods/service. Consumer surveys are carried out to estimate the WTP for goods
or service under consideration.
The WTP can be estimated using three different ways:
- By observing prices that people pay for similar goods in various other markets
- By observing individual expenditures on money, time and labor, etc. to obtain goods, OR to avoid their loss. This method might involve an assessment of coping strategies and involve observations, focus group discussions and even house-hold surveys.
- By directly asking people what they are willing to pay for goods and services in the future
Contingent Valuation Methodology (CVM) creates a
hypothetical market scenario and tries to obtain the value for particular
goods, contingent to the scenario. The economic concept that the CV Surveys are
trying to capture is the maximum amount that the individual would be willing to
pay for certain goods/services.
The most important part of the CV Survey is to simulate a
realistic contingent valuation scenario, which has accurately priced options
that reflect the levels of prices the goods/service provider will have to
charge.
The advantages and disadvantages of the CVM are presented below:
CONTINGENT VALUATION METHOD
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Advantages
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Disadvantages
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1
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CVM captures a fuller range of benefits of service improvements by
investigating people’s maximum willingness to pay for different levels of
service that are currently not available
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The cost of CVM analysis for a smaller project in terms of time and
money are significant. However, incremental costs are relatively modest
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2
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Consumers can bid on a range of different service options, thereby
defining project designs and technology choices
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The results of CVM are often not transferable between locations. This
creates a special focus requirement on sample planning
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3
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The CVM generates information on household ability and willingness to
pay for on-going services, thereby guiding tariff and cost-recovery policy
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Sample size needs to be substantial to avoid problems involved with
aggregation of responses
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4
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If stated clearly, the results of CVM Survey are conceptually easy
for non-specialists
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Individual biases can cause misleading results
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The CVM has proven to be the most popular of available methods for monetary valuation of environment.[1]
The
application of Willingness-to-Pay Survey for a utility roll-out is depicted in the
following figure.
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| How Willingness-to-Pay Study fits into the operational roll-out for utilities? |
The chart shows how the study integrates with the other functions of the utility and interacts with them to create an eco-system based on optimum approximations.
Biases
Biases
When a respondent does not answer a survey question
truthfully, it is said to introduce a bias into the survey that undermines the
validity of the survey. Therefore, the basic design consideration of the CV
Survey is to avoid the many biases that might occur.
The different types of biases and the ways to avoid the biases in your CVM study are shown in the table below. These biases also need to be controlled during the interview conducted for the CVM Study.
Main CVM Biases and Errors
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Bias
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Characteristic
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How
to avoid
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Low Strategic Bid
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Respondent lowers their bid assuming
that the state, or others, will pay more
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Emphasize on policy of state that if
the community is not willing to pay sufficiently, the project might not take
off
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High Strategic Bid
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Respondent raises their bid above the
real WTP to ensure that the project goes ahead
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Make it clear that there will be no
subsidies, this is the real amount. Choose correct bidding model
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Hypothetical Bias
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Respondent does not understand or
believe in the options
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Explain options clearly.
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Poor Sampling
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Non-random sample selected which might
result in poor quality of data collected.
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Ensure accurate mapping of survey area
and an appropriate random sampling methodology
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Starting Point Bias
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Starting price for bidding games
influences the final WTP
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Vary the starting prices within the
sampling frame
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Interview and Compliance Bias
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Enumerator influenced biases
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Analyze responses by enumerator and
discard biased responses
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Payment Method Bias
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Payment method does somehow affect the
responses
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This might be a realistic bias
revealing preferences to certain payment method. This can be safely ignored.
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Best practices for Designing WTP Survey
1. · Survey Design should involve easily understood
and pre-tested language, taking feedback from all focus group · Data Collection should be planned with
appropriate attention to sample size, collection methods, sample representation
of general population, and randomized selection · Correct statistical tests need to be applied for
accurate interpretation of the results · Regression results for CVM bids should be
conducted for validating the data · Question Design and interview process should be
developed to reduce the bias introduced in the survey
For a case study on WTP for Water, visit our blog here.
