UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M. IN DEVELOPMENT ECONOMICS APPLYING CONTINGENT VALUATION METHOD FOR ESTIMATING WILLINGNESS TO PAY TO CONTROL URBAN FLOODING IN HO CHI MINH CITY BY NGUYEN DUY CHINH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2014 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M. IN DEVELOPMENT ECONOMICS APPLYING CONTINGENT VALUATION METHOD FOR ESTIMATING WILLINGNESS TO PAY TO CONTROL URBAN FLOODING IN HO CHI MINH CITY A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN DUY CHINH Academic Supervisor: DR. TRUONG DANG THUY HO CHI MINH CITY, DECEMBER 2014 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Despite the implementation of many large scale projects involving in controlling urban flooding in Ho Chi Minh City, the issue of urban flooding has been a long- lasting issue for inhabitants in HCMC.
There are many causes for the problem, both objective and man-made. This study conducts a contingent valuation (CV) study to find out the willingness to pay (WTP) for the controlling of urban flooding issue. The CV survey was done with the direct survey instrument on 180 households in HCMC. Double-bounded dichotomous choice question was also used.
Non-parametric and parametric estimates for mean WTP are VND 464,654 and VND 380,000 per each household respectively. Bootstrapping procedure further solidifies these results. TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1 Measure of change in human welfare. 4 Figure 2 WTP and WTA in the case of perfect substitutability.
6 Figure 3 WTP and WTA in the case of imperfect substitutability. 6 Figure 4 Total economic value. 8 Figure 5 Monthly mean rainfall in HCMC and mean sea water level at Vung Tau. 16 Figure 6 Number of flooding locations in HCMC from 2008 to 2014.
18 Figure 7 Open-bid responses from the pilot survey. 27 Figure 8 Project 1547 overview. 31 Figure 9 Protection for zone I. 32 Figure 10 Protection for zone II.
33 Figure 11 Distribution of age in the sample. 38 Figure 12 Monthly income distribution and House condition. 39 Figure 13 Income and ownership of households with ‘no’ response at VND 50,000. 41 Figure 14 Survivor function of non-parametric estimation.
42 Figure 15 Monthly income classified by education groups. 49 Figure 16 Crystal Ball bootstrapping result for non-parametric WTP. 67 LIST OF TABLES Table 1 Total economic value of the project 1547. 10 Table 2 Three types of commonly used elicitation questions.
20 Table 3 Details of 18 sets of bid used in the survey. 27 Table 4 Distribution of observations across areas. 28 Table 5 Main contents of the questionnaire. 29 Table 6 Interval distribution of WTP responses.
34 Table 7 First bid question response statistics. 40 Table 8 Second bid question response statistics. 41 Table 9 Variables specification. 44 Table 10 Logistic regression result.
46 Table 11 Unrestricted model and Restricted model comparison. 48 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER 1: INTRODUCTION .1 CHAPTER 2: LITERATURE REVIEW .1 Willingness to pay and willingness to accept .2 Total Economic Value .3 Utility Theory and the Utility Difference Approach .4 Contingent Valuation Method .5 Some relevant CVM case studies .1 Current flooding and flooding control state in HCMC .2 The procedure of conducting a CVM study .3 Survey procedure of the study .4 Main contents of the questionnaire .5 Description of the hypothetical project .6 Non-parametric estimation technique.7 Parametric estimation technique .8 Confidence intervals of mean WTP .36 CHAPTER 4: ANALYSIS RESULTS .2 Non-parametric estimation result .3 Parametric estimation results .1 Main findings and policy implication.2 Limitations of the study .59 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1: INTRODUCTION Ho Chi Minh City (HCMC) is one of the largest city and an important economic center in Viet Nam. With the population of 7.8 million people and density of 3,721 people per kilometer square (Wikipedia, 2011), the development of infrastructure cannot catch up with the rapid urbanization rate of HCMC. The inconsistency in the urban development in HCMC caused various problems, one of which is the exceedance in capacity of the urban sewer and drainage system, one of the causes for major urban flooding (Hoc, 2008).
Moreover, the instability of the weather also further aggravates the flooding issue through the heavy rainfall and high rainfall level. In the effort to address the flooding circumstance, the Government has approved two major plans. The first one is the plan of urban drainage improvement and sewer development of HCMC, which was approved by Decision 752 in 2002. The second is the MARD1 construction plan, which was approved by Decision 1547 in 2008.
Both projects have the same goal to help alleviate the flooding in HCMC, but they solve in different approaches. While the former focuses on rehabilitating and developing the inner urban drainage system, the latter seeks to build large scale hydraulic constructs around the city. However, due to the diversity in causes of flooding in HCMC, in order to completely solve the problem, the combination of both projects is required. Research problem and objectives In summary, to deal with the urban flooding issue, not to mention other smaller projects, there are two main projects have been approved and in the process of implementing, which are urban drainage improvement and sewer development of HCMC (project 752) and hydraulic construction plan (project 1547).
However, project 1547 is facing difficulties in appealing investment and cost underestimating, which may delay the project until 2025. Although a specific number of expected 1 MARD stands for Ministry of Agriculture and Rural Development. 1 TIEU LUAN MOI download : skknchat@gmail.com outcomes of the two projects were not given, CBA of these projects expected to relieve all the tangible damage caused by flood in 50 years, which means no heavy flooding will be occurring in the next 50 years (Steering Centre for Urban Flood Control Program, 2013). Are all the aforementioned measures effective or not? Inspection of the all the projects upon completion will be required to answer the question in the future.
Although a CBA analysis for project 1547 has already been conducted. However, the estimating of the benefit of the project in the CBA is based on the ‘flood risk approach’ which did not consider the demand and willingness to pay (WTP) of the inhabitants in HCMC. In addition, the results of the study may serve as a guide for making decisions involving potential urban flooding project implementation and fee collection in HCMC as well as in other areas. Furthermore, potential projects involving flood control in HCMC may also require WTP as an important indicator to estimate the benefit of the project.
Therefore, this study intents to: Evaluate inhabitants’ level of awareness about flood risks in HCMC Determine the aggregate WTP for a hypothetical anti-flooding project Find out the factors governing the WTP of HCMC inhabitants. In order to answer these questions, Contingent Valuation Method (CVM) will be applied in conjunction with the direct interview survey instrument to measure the willingness to pay for the elimination of urban flooding in HCMC. The result in the study may be used in policy making for deciding whether or not a project would be feasible to be conducted in the future. It may be also helpful for the process of inspecting the effectiveness of the project 1547 and 752.
2 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 2: LITERATURE REVIEW Benefits and costs of a public good or an environmental good are difficult to determine since public goods or environmental goods usually do not have a price. Moreover, the costs and benefits are mostly dependent on individuals’ preferences. Given a public good is provided, the individual’s benefit can be measured by measuring how much that individual is willing to give up to obtain that public good. On the contrary, the individual’s cost when a public good is lost is measured by the value of something else that individual would accept to compensate for the loss.
In terms of welfare, money is usually used as a standard measure. In that case, the measure of benefit is the willingness to pay (WTP) to obtain the benefit or willingness to accept (WTA) to compensate for the lost. The measure of cost is WTP to avoid the cost and WTA to tolerate the same. Many techniques have been invented with the purpose of estimating the WTP and WTA for the provision or decrease in public goods.
Bateman et al. Contingent Valuation Method (CVM) and Choice Modelling (CM) are commonly used SP techniques by researchers to estimate WTP and WTA. While CM involves in inferring a value from the change in attribute levels of a public good, CVM directly collects individuals’ stated WTP by eliciting a scenario for respondents. This chapter will present some basic concepts of economic valuation, which are WTP, WTA, Total Economic Value (TEV), Utility Theory, the Contingent Valuation Method and several CVM empirical applications.1 Willingness to pay and willingness to accept Pearce (1997) defined willingness to pay is the monetary valuation that was placed by an individual for a good or service.
WTP is constrained by ability to pay so that any people with higher income will value goods or services more highly than that with lower income. Field (1997) and Pearce (1992) also pointed out that willingness 3 TIEU LUAN MOI download : skknchat@gmail.com to accept is not constrained by the individual’s income, as is willingness to pay. Thus, when people are asked willingness to accept questions, their answers are usually higher than their willingness to pay for the same item. According to Bateman et al.
(2002), the concept of WTP and WTA can be graphically illustrated using indifferent curve. The vertical axis represents the expenditure in money unit of an individual on the private good (y). The horizontal axis represents the quantity of a public good (x). The indifferent curve I and I’ represent two linked combinations which have the same level of utility of two distinct individuals, with I has a lower level of utility than I’.
Figure 1 Measure of change in human welfare Source: Bateman et al., 2002 If there is a change in the quantity of a public good, the value of the change can be measured using four measures, two of which are WTP and WTA. First, suppose there is an increase in the quantity of public goods from x0 to x1 and the individual’s initial consumption point is at A. With the increase in the quantity of public good, the 4 TIEU LUAN MOI download : skknchat@gmail.com individual can enjoy x1 of the public good, but the private consumption is reduced by BC, in other words, the new consumption point is now C. The amount BC is defined as the WTP for the increase in the public good (or the compensating variation for the increase in the public good).
Second, if the initial consumption of the individual is at B and there is a decrease in quantity of public goods from x1 to x0, but the individual enjoys a higher level of private consumption, y1, moving the consumption point from B to D. The amount DA is the amount of private consumption needs to be compensated for the loss in the public good, specifically in this case, the WTA for the reduction in the public good is DA (or the compensating variation for the reduction in the public good). The third and the fourth measure are equivalent variation for the increase in the public good (equivalent gain) and equivalent variation for the decrease in public good (equivalent loss).