Embedding effect
Encyclopedia
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.
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 elicted 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).
Environmental economics
Environmental economics is a subfield of economics concerned with environmental issues. Quoting from the National Bureau of Economic Research Environmental Economics program:...
.
The effect suggests the contingent valuation
Contingent valuation
Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination...
method is not an unbiased approach to measuring policy impacts for cost-benefit analysis
Cost-benefit analysis
Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
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
Clean Water Act
The Clean Water Act is the primary federal law in the United States governing water pollution. Commonly abbreviated as the CWA, the act established the goals of eliminating releases of high amounts of toxic substances into water, eliminating additional water pollution by 1985, and ensuring that...
, 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
Contingent valuation
Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination...
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 payWillingness to pay
In economics, the willingness to pay is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good or to avoid something undesired, such as pollution...
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 elicted 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
Consumer theory
Consumer choice is a theory of microeconomics that relates preferences for consumption goods and services to consumption expenditures and ultimately to consumer demand curves. The link between personal preferences, consumption, and the demand curve is one of the most closely studied relations in...
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).