Willingness to Pay Example: Drivers’ WTP to Reduce Air Pollution

I post a published article below with its table of contents as a simplified willingness to pay example for graduate students taking up the course “Economic Valuation of Environmental and Natural Resources. Specifically, the article demonstrates the use the contingent valuation method of eliciting drivers’ willingness to pay.

As part of the course requirements, students taking the course have to submit a simple, practical, and quick application of any of the economic valuation techniques they have learned in the modules. I need to demonstrate this willingness to pay (WTP) survey myself to show what outputs I expect from them. 

I did this study with the undergraduate students’ help as enumerators two decades ago (2002-2003). This activity was conducted in response to the call for professor-student collaboration in research.

But first, let me define the willingness to pay concept.

Willingness to Pay Defined

The willingness to pay concept, or in economics circles, simply referred to as WTP, is the maximum a consumer will spend on one unit of a good or service or pay to avoid losing a service. The amount will vary depending on the person’s circumstances and characteristics.

For example, a citizen living in the desert might be willing to pay more for water compared to someone living near areas that have many freshwater streams and rivers. Or perhaps, a person will be willing to pay more if he or she is well-off for a particular good. The living condition of the first person dictates his or her behavior while in the latter, wealth plays a role.

Thus, the WTP for a good or service varies within the individual himself or herself and between persons. No exact value for a certain good is expected. WTP values range from a low level up to a maximum level the person is willing to give up to obtain a good or service.

Willingness to Pay in Environmental Economics

In environmental economics, the willingness to pay example featured in this page focuses on an environmental attribute, not a consumed good produced by manufacturers as we know. WTP is the price that an individual would be willing to pay to avoid the loss of an environmental service or quality.

The environmental quality discussed here refers to clean air, considered free in the past. Environmental economists call that the free rider problem. People enjoy something without paying for the benefit that they gain. But of course, we know that maintaining environmental quality comes at a cost.

For example, if we pollute the air, we suffer the consequences. Doing so incurs health costs like a higher risk of respiratory infections, lung cancer, asthma, among sicknesses associated with dirty air.

Willingness to Pay Example Background

I published an earlier version of this willingness to pay example on vehicle owners’ WTP for vehicle maintenance in the university’s journal after presenting it during a conference in 2006. Nobody in the audience made any comment during that conference, perhaps because of the novelty of the study.

Besides, economic valuation is a relatively new field compared to the other disciplines. It was also challenging to access scientific articles on economic valuation as references at that time. The Internet was in its infancy.

Hence, I share it here so that others will access it and avoid the same problem as I had before. Now, I integrate accessible literature I can find in Google Scholar and on the web, in general, to strengthen the write-up.

This version is an updated one with my edits and enhancements, including the application of Search Engine Optimization (SEO), so other students nationwide and worldwide will find it if they need it – for FREE. Many economic valuation studies are hosted behind a paywall, and it would be a frustrating experience for a student who cannot pay for it. I believe that publications should be open access as a way forward to advance science.

Hence, I wrote this willingness to pay example for students’ reference. Specifically, it is a contingent valuation method example, where respondents were given a hypothetical scenario by the students using a questionnaire.

Disclaimer on the Willingness to Pay Example

This willingness to pay example may not be a perfect piece, but I will make the necessary revisions to obtain more information about this subject. Hence, this article is subject to scrutiny. 

This article follows the IMRAD format, just like those found in the conventional scientific literature. The authors cited in the paper and external resources have hyperlinks that serve as supplementary material, unlike those found in open access literature that purely relies on published articles during its time and in the past.

I will make the necessary revisions and add more to this willingness to pay survey example as I gather more information. This article will be an evolving report that gets updated each time new information comes. Thus, it does not get obsolete as it will always get updated. This example is a demonstration of thinking beyond the box.

First of Its Kind Online Publication for Search Engines

This dynamic contingent valuation method example will eventually become a first-of-its-kind paper publication approach where readers, including professors who teach the subject, can help improve it through their comments. It will also be a first-of-its-kind article where SEO is applied. It will work like an open-source kernel like Linux that gets enhanced with new developments, technologies and information driven by demand. 

Thus, we will have quality material for students to refer to. It will be a demonstration of author-reader collaboration where readers serve as both critique and referee. In the end, a reader-refereed article will emerge. That will eventually surpass the number of reviewers (usually two) that refereed scientific journals require. This demonstration promotes blogs from professors as a game-changer. Besides, there is a dearth of information on this topic.

So if you are knowledgeable of economic valuation and feel confident with your suggestion, I will be glad if you can identify yourself properly as a professor or a knowledgeable graduate student and write your comments below (Spam is automatically removed from this site). I will respond by making improvements to this article while making changes as I obtain more relevant literature. 

Let’s see how this original post as a willingness to pay example will evolve through time.

Important Note

All monetary values were adjusted for inflation using the Inflation Calculator in westegg.com. Hence, the original amount in 2002 was converted to 2019 value based on inflation rates in the past.

Vehicle Owners’ Willingness to Pay for Maintenance Costs
to Improve Air Quality

ABSTRACT

This study aims to assess the four-wheel vehicle owners’ willingness to pay (WTP) for vehicle maintenance expenses to improve air quality through reduced emissions. The willingness to pay survey consisted of 137 private vehicle owners, jeepney drivers, and truck drivers. To test for sample homogeneity, F-test was used, followed by a t-test to compare private and public vehicle owners’ WTP. Multiple regression analysis was employed to determine which of the independent factors, namely age, income, and vehicle type and age, significantly contribute to WTP variance. The study revealed that private vehicle owners are willing to spend three times the WTP of public utility vehicle owners. Further, the multiple regression analysis results showed that income is a significant predictor of WTP, and the model explains 47.36% of the variance in the dependent variable.

Keywords: contingent valuation method example, contingent valuation, willingness to pay, air quality, Puerto Princesa

Introduction

The Philippine Clean Air Act or Republic Act 8749 of 1999 states that the State shall pursue a balanced development and environmental protection policy. The law aims to maintain clean air that meets the National Air Quality guideline values for criteria pollutants throughout the Philippines while minimizing the possible associated impacts on the economy. It mobilized the Department of Transportation and Communications (DOTC), with the Department of Trade and Industry (DTI) and the Department of Environment and Natural Resources (DENR) to implement emission standards for motor vehicles set by the Environmental Management Bureau (EMB). These agencies were tasked to formulate and implement a national motor vehicle inspection and maintenance program to promote all motor vehicles’ efficient and safe operation.

The law encourages cooperation and self-regulation among citizens and industries by applying market-based instruments (Republic Act 8749, Section 3b). The law primarily focuses on pollution prevention rather than control. The market-based approach abates pollution (Jenkins & Lamech, 1992) because economists believe that using this approach will induce the private sector to reduce pollution emissions. 

Thus, emission testing centers were established for the said purpose (Article 4, Section 21). Its implementation brings consciousness among vehicle owners that they must undertake steps to ensure that their vehicles comply with the emission standards set by concerned agencies of the government. If not, owners will be fined PhP2,000 ($60.25) at first offense, PhP4,000 at second offense, and PhP6,000 for the third offense (DOTC Joint Administrative Order 2014 – 01). Hence, vehicle owners need to spend on maintenance if their vehicles are aging, thus prevent harmful emissions.

The standard requirement for emissions means that achieving a certain level of air quality entails cost. The cost entailed approximates the value of better air quality as a result of reduced exhaust gas emissions.

It is expected that a person’s wealth can affect his willingness to sacrifice; the wealthier a person is, the better the person can afford to pay for various goods and services. Therefore, willingness-to-pay or WTP also reflects the ability to pay (Carlsson and Johansson-Stenman, 2000; Wang and Mullahy, 2006).

Given the above premises, the economic value placed on air quality as an environmental resource can be estimated using the vehicle owners’ willingness to set aside specific amounts of money to minimize their vehicles’ emissions. The cost entailed approximates the value of improvement in air quality due to reduced exhaust gas emissions. Although the amounts could vary, some general trends may be obtained and may well reflect the value of air quality improvements.

The specific amounts that the person is ready to give up depend on his capacity to pay and personal characteristics and values. For example, Erdem et al. (2010) reported that variables such as income, gender, education, concerns about global warming, number of automobiles, importance of automobile performance, risk preference, attitude toward the alternative energy sources influence the consumers’ willingness to pay a premium for hybrids [1].

Consumers with high income, high educational level, and global warming concerns are more likely to pay a premium for hybrids. Similarly, Ramos-Real et al. (2018) found out that income level, mobility patterns, environmental concerns, and attitude-to-tech of potential buyers are important factors for WTP.

Hence, we conducted this study using the contingent valuation method to gauge the people’s willingness to pay to achieve better air quality in the City of Puerto Princesa. The economic value people place on air quality primarily depends on their capacity to pay. Aside from capacity to pay, the vehicle owners’ age, age of the vehicle, type of vehicle, whether public or private, influence their WTP to improve air quality. The paradigm of this study is given in Figure 1.

Specifically, this study aims to:

1. describe the profile of four-wheel vehicle owners specifically their age, income, age of vehicle and WTP for vehicle maintenance expenses,
2. compare the WTP values of public and private vehicle owners, and
3. determine which among a set of predictors relate significantly to the WTP of the vehicle owners.

Valuation of environmental goods, such as clean air, facilitates the gathering of information for cost-benefit analysis as a tool in supporting public sector decision-making processes. This exploratory study attempts to determine the value of potential air quality improvements by assessing vehicle owners’ willingness to pay for better air quality.

This study is relevant to policymakers because tourism inflow spurred rapid development in the city for the past five years. The city’s tourist attractions, such as the world-famous St. Paul Subterranean River National Park (SPSRNP), drew visitors not only locally but internationally. Due to greater demand for development and services to adequately cater to the needs of the tourists and associated businesses, particularly transportation needs, people’s in-migration led to a proliferation of vehicles, thereby contributing to higher atmospheric emissions levels.

Further, this study aligns itself with the RA 8749 or the Philippine Clean Air Act as the law encourages the application of market-based instruments for citizens to self-regulate. The use of techniques in economic valuation of air quality can help support the government’s sustainable development drive.

Method

Contingent Valuation Method

The contingent valuation method is a valuation technique to estimate the value that a person places on a good. The value is contingent upon the existence of a hypothetical market, as described in the survey put to respondents (Ulibarri and Wellman, 1997). The approach asks people to directly report their willingness to pay (WTP) to obtain a specified good. In this study, this good is improvements in air quality.

The students conducted face-to-face interviews using a structured questionnaire to vehicle owners to elicit a response on a hypothetical scenario of improved air quality due to reduced emission of pollutants from private or public utility vehicles. Passenger vehicles are significant pollution contributors, producing substantial amounts of nitrogen oxides and carbon monoxide, among others (Manojkumar, et al., 2020). Keeping these vehicles in top condition requires the responsible allocation of maintenance expenses to minimize air emissions.

Many factors influence a person’s willingness to sacrifice for the sake of maintaining a cleaner environment or make improvements to it. People’s willingness-to-pay reflects the value placed on achieving better air quality. This value is the value that a person is willing and able to sacrifice to achieve better air quality. Hence, the WTP for vehicle maintenance serves as the measure associated with air quality improvement. Well-maintained vehicles mean fewer emissions, thus improved air quality.

Respondents of the Study

We randomly selected one hundred thirty-seven (137) vehicle owners, stratified into public and private vehicles. The students asked them to state their preferred amount to keep their vehicles in good working condition, mainly focusing on reducing harmful gas emissions for improved air quality. These are owners of cars and pickups, small shuttle buses, and small trucks operating in the City of Puerto Princesa. Government-owned vehicles were excluded from the sample.

Data Analysis

I used STATISTICA (ver. 5.5) to analyze the survey data. Independent samples t-test was used in comparing the maintenance expenses of public and private vehicle owners. I performed a correlation analysis before subjecting the data to multiple regression. I tested the independent variables, namely age of respondent, income, age of the vehicle, and vehicle type (public or private). I used the amount of maintenance expenses the vehicle owners are willing to spend to reduce or prevent exhaust gas emission as the dependent variable. Although the t-test is a robust test for comparing the means of two groups, I verified the results using its nonparametric counterpart, the Mann-Whitney U test, to address variance heterogeneity.

Results

Profile of Vehicle Owners and WTP for Vehicle Maintenance Expenses

Table 1 presents a summary of the respondents’ age, income, and age of vehicle and the amount they are willing to spend for maintenance to avoid the emission of harmful substances into the air.

Age distribution profile approximates a normal distribution as indicated by roughly the same mean and median of 37. The vehicle owners’ annual income ranges from PhP43,200 ($1,301.44) to more than a million, with a mean of PhP103,409.90 ($3,115.31) and a median of PhP86,400 ($2,602.86). This finding shows that income distribution is positively skewed, or more people are earning in the lower-income bracket. Hence, the median is a better measure of income as high- income respondents tend to pull the mean to a higher number. Vehicles on the road could be as old as thirty years while some were new.

Comparing the mean and median, however, indicates that there are relatively newer ones than older ones. About a third of these vehicles are below five years of age. The vehicle owners allocate a hundred pesos to PhP96,000 ($2,892.08) for vehicle maintenance to reduce exhaust emissions.

Comparison of the WTP of Public and Private Vehicle Owners

Table 2 presents the result of the t-test to compare the WTPs of public and private vehicle owners.

The t-test results shown in Table 2 indicated that private car owners posted three times the amount of public utility vehicles are willing to spend on maintenance expenses. The higher amount can be explained by significant income differences between the private and public vehicle owners. Private vehicle owners, on average, earn PhP6,864.94 ($206.82), while public vehicle owners make PhP2,306.64 ($69.49) monthly.

Predictors of WTP

Multiple regression analysis (Table 3) showed that among the independent variables, income is a significant predictor (p = 4.34 x 10^-17) of the amount of vehicle maintenance expense, and the model explains 47.36% (adjusted r² = 0.4736) of the variance in the dependent variable. This result confirms that income does determine the value placed on improvements in air quality (Wang and Mullahy, 2006).

Output of Multiple Regression Analysis

R-squared value, F value, and p value

Regression summary of the predictors of WTP for vehicle maintenance expenses

Discussion

Balancing the costs and the benefits of achieving better air quality will make clear environmental policy options. A better understanding of the problem requires using the tools of economic valuation to facilitate manipulation of fair estimates of non-marketable goods and services such as environmental amenities.

Valuing a certain level of environmental quality, such as improvements in air quality, is not easy. However, the purpose of environmental accounting is not to value the entire environment; instead, it is to evaluate the benefits and costs associated with changes made to the environment by human activity (Feinstein and Picciotto, 2000). This study attempted to do just that. It is built on the assumption that the value of air quality depends on people’s willingness to spend on vehicle maintenance to reduce emissions with the end goal of achieving improvements in air quality.

Income as Predictor of WTP

The findings obtained in this study confirm that people’s willingness to pay depends to a large part on their income (Bergstrom et al., 1985; Brouwer and Bateman, 2001; Macmillan et al., 2001; Veisten et al. 2004) although some researchers find that income has no significant effect (Macmillan et al., 2001; White et al., 1997).

This result subscribes to the environmental theory that people’s willingness to pay is determined by wealth. There are other reasons and circumstances surrounding people’s preferences in obtaining benefits from goods and services available to them, particularly on air quality. Income accounts for roughly half of the variation in vehicle owners’ WTP.

Other Predictors of WTP Related to Air Quality

Among other reasons that affect WTP for addressing air pollution include ethical aspects that affect the individual’s decision-making process (Ojea and Loureiro, 2007), gender, higher educational level, concerns about global warming (Erdem and Simsek, 2010), awareness of air pollution in daily life, governmental credibility regarding air pollution prevention (Wang et al., 2019), NIMBY attitude, energy expenditure, economic loss caused by smog (Sun et al., 2016) altruism towards society in general, among others (Field and Field, 2017).

Given the findings, willingness to pay for desired environmental quality still depends mainly on people’s wealth or income as it accounted for almost half of the variance in WTP. In the absence of regulations, the default scenario is still making “cheaper versus cleaner” tradeoffs because reducing emissions costs money.

Enforcement as Critical Intervention for Compliance to RA 8749

The results of this study suggest that if non-compliance to regulations costs less in the absence of regulation enforcement, then vehicle owners will opt for it. During the interview, some public utility drivers would not comply with air emission requirements unless strict enforcement is applied. Colorum vehicles ply the streets when enforcement is weak or not visible such as on minor roads.

Thus, if air quality has to be improved in the country, the government must have the money to enforce the law and the citizens, the vehicle owners in this context, the financial means to comply with the Act. Most industrialized countries—which typically suffered from high levels of urban air pollution several decades ago—have managed to essentially clean the air in their cities, despite a very high and still growing energy use per capita (Larson et al., 2000).

The Philippine Clean Air Act serves to bring consciousness among vehicle owners that there is a price to pay in achieving desirable air quality. As provided for in Section 46 of the Philippine Clean Air Act, no motor vehicle shall be registered with the DOTC unless it meets the emission standards set by the Department of Environment and Natural Resources. This provision requires vehicle owners to spend on maintenance to keep their vehicles from belching smoke and to pass emission tests during registration.

The Act, therefore, serves to mitigate the proliferation of inefficient machines and encourages new vehicles plying the roads. Apparently, this purpose was not well-served because, as this study revealed, two-thirds of the vehicles operated by the respondents are more than five years old. It is surprising that with all the emission centers where vehicles must submit, vehicles exceeding the period of optimal engine performance of roughly five years still predominate.

This issue raises two questions:

• Are existing emission standards valid, or
• Are the standards set by the EMB-DENR strictly enforced?

This concern is beyond the scope of this study. The investigation requires the conduct of research focused on answering these questions.

Conclusions

Based on the findings derived from this study, I conclude that:

1. Private vehicle owners are three times more willing to spend on maintenance expenses; and
2. Income is a significant predictor of a person’s willingness-to-pay towards improvements in air quality.

Acknowledgments

I am grateful to the students of environmental science taking up Environmental Economics during the second semester of the school year 2002-2003 to seek out vehicle owners. I am likewise grateful to Mismah, Research Office student aide, who encoded the data. I also thank all vehicle owners who cooperated by providing details on their income, responding to questions that require them to pause and think, among others.

Additional Acknowledgments

[I shall enumerate the names and affiliation of those who critique and make relevant suggestions to this article.] – par

References

Bergstrom, J. C., Dillman, B. L., & Stoll, J. R. (1985). Public environmental amenity benefits of private land: the case of prime agricultural land. Southern Journal of Agricultural Economics, 17(1378-2016-111181), 139-149.

Brouwer, R., & Bateman, I. (2000). The temporal stability of contingent WTP values. Centre for Social and Economic Research on the Global Environment.

Carlsson, F., & Johansson-Stenman, O. (2000). Willingness to pay for improved air quality in Sweden. Applied Economics, 32(6), 661-669.

Erdem, C., Şentürk, İ., & Şimşek, T. (2010). Identifying the factors affecting the willingness to pay for fuel-efficient vehicles in Turkey: a case of hybrids. Energy Policy, 38(6), 3038-3043

Feinstein, O., & Picciotto, R. (Eds.). (2000). Evaluation and poverty reduction: Proceedings from a World Bank conference. The World Bank.

Field, B. C., & Field, M. K. (2017). Environmental economics an introduction. The McGraw-Hill.

Jenkins, G., & Lamech, R. (1992). Market-based incentive instruments for pollution control (No. 1992-02). JDI Executive Programs.

Larson, D. F., Varangis, P., & Yabuki, N. (2000). Fuel for thought: An environmental strategy for the energy sector. The World Bank.

Macmillan, D. C., Duff, E. I., & Elston, D. A. (2001). Modelling the non-market environmental costs and benefits of biodiversity projects using contingent valuation data. Environmental and Resource Economics, 18(4), 391-410.

Manojkumar, R., Haranethra, S., Muralidharan, M., & Ramaprabhu, A. (2020). IC Engine emission reduction using catalytic converter by replacing the noble catalyst and using copper oxide as the catalyst. Materials Today: Proceedings.

Ojea, E., & Loureiro, M. L. (2007). Altruistic, egoistic and biospheric values in willingness to pay (WTP) for wildlife. Ecological Economics, 63(4), 807-814.

Ramos-Real, F. J., Ramírez-Díaz, A., Marrero, G. A., & Perez, Y. (2018). Willingness to pay for electric vehicles in island regions: The case of Tenerife (Canary Islands). Renewable and Sustainable Energy Reviews, 98, 140-149.

Sun, C., Yuan, X., & Yao, X. (2016). Social acceptance towards the air pollution in China: evidence from public’s willingness to pay for smog mitigation. Energy Policy, 92, 313-324.

Ulibarri, C. A., & Wellman, K. F. (1997). Natural resource valuation: A primer on concepts and techniques (No. PNNL–11661). Pacific Northwest National Lab.

Veisten, K., Hoen, H. F., Navrud, S., & Strand, J. (2004). Scope insensitivity in contingent valuation of complex environmental amenities. Journal of environmental management, 73(4), 317-331.

Wang, B., Hong, G., Qin, T., Fan, W. R., & Yuan, X. C. (2019). Factors governing the willingness to pay for air pollution treatment: A case study in the Beijing-Tianjin-Hebei region. Journal of Cleaner Production, 235, 1304-1314.

Wang, H., & Mullahy, J. (2006). Willingness to pay for reducing fatal risk by improving air quality: a contingent valuation study in Chongqing, China. Science of the Total Environment, 367(1), 50-57.

White, P. C., Gregory, K. W., Lindley, P. J., & Richards, G. (1997). Economic values of threatened mammals in Britain: a case study of the otter Lutra lutra and the water vole Arvicola terrestris. Biological Conservation, 82(3), 345-354.

Glossary

Colorum. A public transport vehicle operating without a franchise.

Hybrid. A car with a gasoline engine and an electric motor as options to run the vehicle.

NIMBY. This acronym is a contraction of Not In My Backyard attitude.

© P. A. Regoniel 26 November 2020; updated 23 November 2021

[cite]