Your company has been awarded a project to build a dam that would provide hydroe

Question

Your company has been awarded a project to build a dam that would provide hydroelectric power. But that 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. The project manager has asked you to answer these questions:
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?

Explanation / Answer

a. No I will not be equally confident in the two sets of estimates. This is because contingent valuation method involves a high degree of subjectivity. It is a stated preference technique and the preference for each individual cannot be same. Thus variations are bound to be present in the two sets. Contingent valuation method takes into account the willingness of a person to pay for a specific product and the quantum of this willingness will differ from person to person.

b. I would recommend the first approach because by asking how much compensation people would require to give up the streams you will elicit a more tangible and objective response. This approach will lead to creation of a hypothetical marketplace and so the valuation will be stripped of all subjectivities.

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