Embedding effect

The embedding effect is an issue in environmental economics.

The effect suggests the contingent valuation method is not an unbiased approach to measuring policy impacts for cost-benefit analysis of environmental, and other government, policies. Few government policies are independent of any other governmental policy. Most policies involve either substitute or complementary relationships with others at either the same or different intergovernmental level. For example, the protection of coastal water quality is a goal of both state and multiple federal agencies. The Clean Water Act, wetlands protection programs, and fisheries management plans all address coastal water quality. These policies may be substitutes or complements for each other. These relationships complicate the application of the contingent valuation method. The resulting problems that may be encountered have been called the part-whole bias and sequencing and nesting.

Part-Whole Bias

If the contingent valuation method is used to elicit willingness to pay for two government policies independently (the parts) the sum of the independently estimated willingness to pay amounts may be different from the willingness to pay elicited for both projects (the whole). This result is troubling if the projects are geographically related, for example, different wilderness areas (McFadden, 1994). This result does not violate the nonsatiation axiom of consumer theory if projects are perfect substitutes (Carson and Mitchell, 1995). Several applications of the contingent valuation method have found an absence of part-whole bias (e.g., Whitehead, Haab, and Huang, 1998).

Sequencing and Nesting

A related issue occurs with the sequential valuation of projects. Consider a two-part policy valued in two different sequences. The willingness to pay for a project when valued first will be larger than when the question is placed second. Independent valuation, in effect valuing each project at the beginning of a sequence, will always lead to the largest of the possible willingness to pay estimates. This result is expected for the value of public goods estimated with the contingent valuation method due to substitution and income effects (Hoehn and Randall, 1989; Carson, Flores, and Hanemann, 1998).

References

• Carson, Richard T., and Robert Cameron Mitchell, “Sequencing and Nesting in Contingent Valuation Surveys,” Journal of Environmental Economics and Management, 28, 155-173, 1995.

• Hoehn, John P., and Alan Randall, “Too Many Proposals Pass the Benefit Cost Test,” American Economic Review, 79, 541-551, 1989.

• Carson, Richard T., Nicholas E. Flores, and W. Michael Hanemann, “Sequencing and Valuing Public Goods,” Journal of Environmental Economics and Management, 36, 314-324, 1998.

• McFadden, Daniel, “Contingent Valuation and Social Choice,” American Journal of Agricultural Economics, 76, 689-708, 1994.

• Whitehead, John C., Timothy C. Haab, and Ju-Chin Huang, “Part-Whole Bias in Contingent Valuation: Will Scope Effects Be Detected with Inexpensive Survey Methods?” Southern Economic Journal, 65, 160-168, 1998.