I was recently asked to do some work involving choice modelling as a method to calculate 'willingness to pay' for things such as job losses; wetland expansion; waterbird breeding; number of endangered species; and so on. What I do not understand[1] is why it is even necessary?
I'm a firm believer in subjective rather than objective values and that the nature of human beings is that values are constantly changing. You can measure values at a point in time – you can say that because I traded an apple for an orange at point x, I valued the orange more at that point in time (and the person I traded with valued the apple more at that point in time). But values change – an hour later I may prefer the apple. You also cannot prescribe a monetary value to that trade – money itself is an economic good, subject to the same changing preferences and diminishing marginal utility as any other economic good. It would be like trying to say the apple and orange transaction was worth a total of one pear.
Choice modelling does not measure past actions (exchange), it merely relies on a survey asking people to reckon their demand curves based on a few options…no doubt due to the impossibility of mapping a full schedule of preferences. But that means that, by necessity, a certain number of alternatives must be excluded from the menu of options over which a person can hypothetically spend their money. The result is that the conclusions about people's 'willingness to pay' will be misleading at best[2].
In the surveys, people are asked to choose between certain 'costs', but how can a choice be made, unless there is some common unit of measurement by which to calculate human vs. environmental vs. other costs? Value is subjective, therefore so is cost, meaning information about human cost is not directly observable…the only information we have about human cost is revealed through voluntary exchange; through trade. In a voluntary exchange, each person reveals that the thing they acquire is ranked higher on their personal value scale than the thing they give up.
For example, environmental degradation for one person may not be another person's degradation. A farmer viewing the encroachment of the wetland onto his cultivated field may regard it as damaging while another person may find it beneficial. Without reference to the impact on a decision-making individual the whole idea of an environmental cost is nonsensical. So if that’s the case, then we’re back to the problem of comparing human valuations.
The only solution that I can see – the solution that works elsewhere – is a price system, which implies private property rights and the freedom to voluntarily exchange that property. Anything to the contrary will lead to superficial or misguided claims and potentially damaging policy recommendations. To put it bluntly, we need a free market for water.
How about this as a solution: instead of the government forcing everyone to pay additional fees to create more wetlands, create a holding company (which owns the land) and auction off shares, say one billion shares at whatever price people are willing to pay, to anyone willing to buy. Then if the majority wanted to preserve the wetlands, waterbirds and endangered species, as owners of the land, they could reduce the amount they supply for irrigation. If the farmers value the water more than the residents value the wetlands, then they will outbid them for water. They are not going to drain the thing dry; and as with every good, water has a diminishing marginal utility. The first x amount of water has far more value to the farmer than the remaining y. It is likely that residents will value y more than the farmers and will therefore outbid them. This is just one of an infinite number of potential ways the market could fix the problem of water shortages and is the beauty of the market system; we can never know in advance how it will solve problems until it does.
Yes, market prices would probably end a lot of farmers, but it is the only fair way. Why is it that only government is allowed to buy up water – why not allow private citizens to do it as well (they are ultimately paying for it anyway). Under a private system of ownership – or even a quasi-private one in which water rights would be created then bought and sold freely between whomever was interested (if the government wanted to keep land ownership but sell water) – the water would go to the people willing to pay for it. If people actually had to pay market prices for water, and that water were privately owned, it is doubtful that the kind of waste that has occured and is still occuring would exist today. Government policies have resulted in misallocated resources and development that cannot be sustained. The solution, as with most things, is not more government involvement and 'choice modelling' to determine how much they can plunder from the populous without a voter backlash, but a free market in water.
[1] I do understand: there are a lot of socialists in charge who will not even comprehend a non-governmental solution. As a socialist system cannot calculate, they are forced to resort to these 'second best' solutions.
[2] Not only that, but due to 'budget and time constraints', something called 'benefit transfer' has been developed, where preferences from prior surveys on different (but 'similar') issues are used to estimate 'willingness to pay' for a new scenario. The problem with this is that it makes little sense to talk about how much people value something independent of them being in a specific situation where they have to make their choice. How much people value things will always be contingent on the time and place and therefore 'benefit transfer' will be even more misleading than a normal choice model.
