1. Introduction
Degradation of water quality is an ongoing issue for water resource users between high- and lowland areas [
1]. Due to leaching of agrochemicals and the export of sediments caused by agricultural intensification in the highland areas, water pollution is very common along the river basin in East and Southeast Asian countries [
2,
3,
4,
5,
6,
7]. This results in degrading water quality, threatening aquatic ecosystems in downstream areas [
8,
9].
In the highland areas of the Han River basin, South Korea which is the primary source of drinking water supply to the Seoul metropolitan area of South Korea, agriculture is dominated by vegetable (e.g., Chinese cabbage and radish) production and is characterized by a high level of chemical fertilizer inputs [
10]. Because of the intensive use of agricultural chemicals, in particular nitrogen and phosphorous being the main pressures dominating the ecological status of the basin [
11], they have been identified as hotspots of non-point pollution due to soil erosion accelerated by the monsoon climate, which causes deterioration of the important freshwater resources [
12,
13]. Even though several measures including the introduction of a water use charge (water users in downstream areas (Seoul, Incheon, and part of Gyeonggi_do) that are supplied with water from upstream water source protection zones (part of Gyeonggi_do, Gangwon_do, and Chungcheongbuk_do) of the Han River basin have to pay a water use charge, which has been increased from KRW 80 per cubic meter in 1999 to KRW 170 per cubic meter in 2012 [
14] (KRW is the currency unit of South Korea and, at the time of the survey (year 2012), USD 1 equaled KRW 1,126.25) as an incentive to designate water source protection zones in upstream areas since 1975 have been implemented, water quality deterioration due to highland agricultural activities still continues. Thus, downstream water users have called for a highland agricultural restriction policy including the abolishment of highland vegetable cultivation [
15]. However, such crop production is the main source of income for local farmers in the highland areas [
16]. The current situation is that the Korean government and downstream residents support stopping agricultural activities susceptible to environmental problems, while highland farmers and local governments wish to continue these activities.
Within this context, a highland agricultural restriction policy was proposed and has been under extensive discussion in public media and among land use policy makers [
15]. The aim of the policy is to prevent turbid water inflows to the Han River basin via the conversion of vegetable cultivation to other alternatives such as perennial crops or forest trees in the highland areas, i.e., trade-offs between benefits through water quality improvement and opportunity costs of abandoning current highland agriculture. Obviously, if the policy is approved, it puts limits on economic activities of residents in the upstream areas in order to protect or improve water quality, which means they are deprived of opportunity for potential economic benefits with respect to utilizing natural resources. Residents in down- and midstream areas are, on the other hand, provided with safe and clean water through the implementation of the policy, which means they gain more benefits from the water use [
17]. To accomplish equal distribution of the benefits of using water resources between river basin stakeholders, there should be a financing mechanism to support highland farmers for the conversion in order to compensate for their expected income loss. Therefore, it is essential that the government should ensure adequate financing available to effectively manage water quality [
18].
Since the benefits generated by water quality improvement are not traded in real markets [
19], this requires the use of non-market valuation methods to estimate these benefits [
20]. Among various non-market valuation methods, we used the double-bounded dichotomous choice contingent valuation method (CVM) to investigate the benefits associated with increase in water quality generated by a highland agricultural restriction policy. The double-bounded dichotomous choice CVM developed by Hanemann et al. (1991) [
21] includes two payment questions, offering two different bids. If the first bid is accepted (rejected), a higher bid (a lower bid) is proposed in the follow-up question so that an individual can make a decision whether they agree to accept or reject the proposed bids. Since the individual’s willingness of pay (WTP) can be below or above a bid amount or between the two bid amounts, the double-bounded model could have the potential to identify the WTP location more accurately, hence improving the estimates [
22].
This method might, however, cause other undesirable response effects, known as shift [
23], anchoring [
24,
25], and yea-saying effects [
26,
27,
28,
29]. Cameron and Quiggin (1994) [
30] indicate that despite the high correlation between the WTP distributions signified by the first and second bids, the WTP distributions are not equivalent in the double-bounded model. This is because the variance from the second WTP estimate is larger than the first. The offer of the second bid could, in addition, surprise respondents due to their unfamiliarity with the institutional design of the double-bounded dichotomous choice CVM, thus causing diverse strategic answers (anomalous preferences) [
31,
32], and less precise WTP estimates [
32].
A few studies have tried to identify and control these effects [
23,
24,
25,
27,
28,
30], but most of them show that controlling for biases in the double-bounded dichotomous choice format may lead to a loss in efficiency and estimate precision [
22]. In this study, we further examine respondents’ aberrant behavior by comparing the accepted bid amounts from the dichotomous choice question with the maximum WTP amounts from the open-ended question at the last stage of the contingent valuation survey. We assume that the inconsistent responses found from the comparison may include yea-saying, which shows more respondents’ strategic behavior [
26]. We thus consider the aberrant responses as the inconsistent response effects including the yea-saying bias in this study.
In this regard, our analysis aims: (1) to provide a robust way for the improvement of precision in model estimation by controlling shift, anchoring, and inconsistent response effects simultaneously in the double-bounded dichotomous choice CVM; (2) to examine households’ willingness of pay (WTP) for the highland agriculture restriction policy in the Han River basin; and (3) to derive the monetary value of the total benefits generated by the water quality improvement policy, and to provide practical solutions that would be useful for the water management based on the benefit–cost analysis. This study makes two contributions to the literature on the impact of water quality management policy on households’ preferences. In terms of methodological aspect, we use a double-bounded dichotomous choice CVM to identify the impacts of the land use restriction policy for water quality improvement and provide an empirical evidence of a statistically significant improvement in the double-bounded model fit by correcting potential preference anomalies. With respect to empirical aspect, we estimate the monetary value (benefits) which can be considered as an ecosystem service value derived from the improvement in water quality due to the implementation of the policy, conduct benefit–cost analysis, and provide practical solutions for the policy relevance.
Our paper is structured as follows.
Section 2 presents the theoretical framework of the study, describing the CVM, random-effects interval-data regression models for the estimation of the welfare change associated with change in the environmental quality, and each of the preference anomalies in detail.
Section 3 describes the study area, survey design, and administration. Empirical results and discussion are provided in
Section 4. Based on the calculation of the benefits, benefit-cost analysis is conducted in
Section 5. Conclusions and policy implications are summarized in
Section 6.
Final focus of this study is in the Han River basin.
2. Methodology
This study deals with the elicitation of the monetary values that people would trade off their income against the improvement of water quality induced by a land use policy such as the highland agricultural restriction program. The land use policy would lead to betterment of environmental condition in terms of water quality, for example, and consequently lead to a change in utility/welfare of individual water users. Therefore, the concept of WTP for changes in utility/welfare can be used to value the outcome of the policy [
33,
34,
35]. This follows the principle that public policy should be based on the aggregation of individual preferences [
20].
A CVM is one of the most prevalent approaches [
36,
37] to estimate the total value (use and non-use value of an environmental good or service [
38,
39,
40]. Regulating the use of non-marketed goods and services would limit their use to a so-called indirect use (non-use), which means stakeholders might benefit from the goods and services regardless of their intention to use [
41]. Stated choices regarding changes in the policy identified via survey reveal actual (or true) behavior. This stated behavior can help to understand the differentiated effects of the policy [
42,
43,
44]. This method inquires respondent’s WTP for the change in environmental quality (e.g., hypothetical improvements in water quality) through the survey instrument in assessing the impact of the policy change on individual welfare [
26,
45]. Given that the responses to a contingent valuation study are usually treated as random variables, a random component is incorporated into the individual’s utility function and the probability of survey response is linked to the WTP distributions based on the assumption that a respondent maximizes his utility [
38,
46].
Among different WTP elicitation methods, the popular double-bounded dichotomous choice question format is applied in this study [
32,
47,
48,
49,
50,
51,
52,
53]. Efficiency in the elicitation of WTP can be increased if repeated bid questions are used [
46]. Respondents are asked about their WTP for proposed changes from given bid values. If the response to the initial bid is positive, a follow-up bid, higher than the initial bid, is asked, whereas, if the answer is negative, a follow-up bid, lower than the initial bid, is asked. Therefore, the method can directly provide a monetary (Hicksian) measure of welfare associated with a discrete change in water quality [
46,
54]. In the dichotomous choice (or closed-ended) question format, the probability that their WTP is equal to or greater than a certain amount of money
that the individuals would pay for water quality improvement is:
where
denotes the cumulative distribution function of WTP. A random utility model is a basic framework for analyzing dichotomous contingent valuation responses. In this model, a respondent certainly knows his utility function. This preference is, however, not entirely observable and is treated as a random variable. The random component of preferences
is, thus, directly incorporated into the indirect utility function,
(
), where (
) represents the scalar for water being valued,
is the vector of the prices of the market goods,
is the socio-demographic characteristics, and
is the respondent’s income, in order to obtain a WTP distribution. In the status quo, the utility function of the respondent is given by
. When a change in water quality from the status quo
to the proposed alternative occurs, the utility function in the final state
is equal to
. In this case, the compensating variation:
, which presents WTP of the individual for a welfare gain (WTP = C) is defined as
(
). It also yields the respondent’s maximum WTP for the change from
to
. If the respondents’ maximum WTP for the change from the initially deteriorated (
) to finally improved (
) water quality state is greater than or equal to the bid proposed
, they will say “yes”. Following the dichotomous choice approach, the probability of “yes” answer can be written as:
Let
= E[WTP(
= Var[WTP(
and
(
) be the cumulative distribution function of the standardised variate
= (WTP
. The probability function can be rewritten as:
where α =
and β =
. Equation (3), where the answer to the dichotomous choice question is a function of a monetary amount, is consistent with an economic model of maximizing utility (WTP) if it can be understood as the survivor function of a WTP distribution [
38,
46]. The econometric model used for WTP estimation is determined by the form of cumulative distribution function of WTP (C),
(
), and the distributional assumption of the random component of the utility function [
55]. If
(
) follows a probit standard distribution and the model is linear, the expected mean WTP is:
where
denotes the vector of parameters,
the vector of characteristics of the respondent, and
the coefficient on the bid level representing the estimated marginal utility of income.
In the double-bounded dichotomous choice CVM, a respondent
is presented with the first bid amount
, and the second (
) for the water quality improvement program. There are, thus, four possible responses: (1) both “yes” and “yes” responses (
); (2) a “yes” followed by a “no” (
); (3) a “no” followed by a “yes” (
); and (4) both “no” and “no” responses (
), which means that the set of observed bid responses (preferences) yields a set of intervals for estimating WTP [
22]. Based on its structure, the researcher is provided with additional WTP intervals of respondents. Estimating the model that the additional information is incorporated into the likelihood function plays a crucial role in improving model accuracy [
22]. In addition, decisions or choices within a range of intervals are common in daily life and are appropriate for the valuation practice where respondents are unacquainted with the environmental goods or services being valued [
56]. It also makes it easy for respondents to reveal their true WTP [
57,
58]. With the double-bounded dichotomous choice data, we estimate the interval data probit model initially formulated by Hanemann et al. (1991) [
21]. This is the format in which the double-bounded model provides the greatest efficiency gains, along with the least equivocalness [
54].
The formulation of general econometric double-bounded model is
, where
represents WTP of the
jth respondent, and
i = 1, 2 for the first and second responses, while
and
correspond to the means for the first and second responses, respectively. Under the assumption that
, the WTP for the respondent (
j) can be rewritten as
. If the response is “yes-yes” in sequence (
), the probability can be simplified as
. If the response is “no-no” in sequence (
), the probability can be simplified as
. For “yes-no” and “no-yes” responses, the probability is that WTP falls in the interval. With the assumption that the random term is normally distributed, the respondent’s contribution to the likelihood function is:
where
YY (“yes-yes”) = 1 and 0 otherwise;
YN (“yes-no”) = 1 and 0 otherwise;
NY (“no-yes”) = 1 and 0 otherwise; and
NN (“no-no”) = 1 and 0 otherwise.
The primary independence assumption developed by Hanemann et al. (1991) [
21] of the double-bounded dichotomous choice CVM is that a respondent’s preference (WTP) remains the same over the first and second payment questions (i.e.,
, which means since observations are independent across the answers to the initial and subsequent payment questions, the preferences of respondents remain the same over the two answers. The double-bounded model, however, undergoes the preference anomalies signifying that the respondents’ answer to the second question might be influenced by the first bid proposed to them [
23,
24,
28]. In other words, the response to the second bid is not always independent from the first bid, indicating that different WTP values could be derived from the same respondent. This can, consequently, lead to inconclusive results since it is unclear whether WTP is correct or not [
22,
30]. Among these potential anomalies violating the assumption above, the two most common are anchoring bias and shift effects.
The anchoring bias follows if respondents who have uncertain information (a poor perception or description given by researchers as a base) on the good valued presume that the first bid is information on the true value of the good [
24,
25,
59]. The respondents may, thus, anchor the value they place on a good in the first bid [
60,
61,
62,
63]. Based on the first bid, the respondent’s anchored preferences (
) could be an adjustment of their previous WTP
. The posterior WTP
generated by the adjustment is, accordingly, a weighted average (
) of the true WTP
and the level of the first bid
provided by the researcher:
, where
[
22]. The more the anchoring effect (
) increases the closer
is to
, thus increasing bias in the WTP estimate.
Shift effects arise if respondents interpret the first bid as information on the true cost of the policy proposed. Under this perception, a respondent who accepts the first bid may regard the second bid as an offer of additional payment for the same object. Similarly, when a respondent refuses the first bid payment, the follow-up question could be interpreted as an offer for a lower quality level of the object [
22,
23]. In other words, the respondents’ preferences shift between
and
. Supposing a respondent’s response to the first payment question
is based on his true WTP, then the response to the second payment question
is based on his true WTP plus the shift effect of a follow up question. The shift effect is taken through the addition of a structural shift parameter
:
, where
[
23]. A negative sign of the shift parameter shows that the follow up increases respondents’ probability of rejecting the second bid [
29], thus leading to decline in the WTP [
22].
In terms of yea-saying bias, respondents exaggerate their true WTP in order to accept researcher’s offers. In other words, they accept any bids proposed from the researcher without considering the bids as information on environmental goods valued [
21], consequently, overstating their true WTP [
26,
27,
28]. One possible explanation for the overstatement of the true WTP is the presence of the warm glow effect, which is an important factor affecting an individual’s decision to make a contribution to the goods [
64,
65]. The contingent valuation response may reflect the individual’s WTP for the moral satisfaction derived from contributing to the goods, not just the economic value of the goods. Therefore, WTP could be changed by levels of the moral satisfaction, which changes by the size of the contribution [
66]. There are many other factors influencing the decision to privately contribute to the environmental goods such as social pressure, guilt or sympathy. All of these factors including the warm glow bias may encourage a respondent to have a higher tendency to say “yes” to the contingent valuation survey question [
26]. The yea-saying bias is mostly involved in ascending bid sequences, thus resulting in an upward bias in WTP [
26,
27,
29].
In the last stage of the contingent valuation survey, respondents are asked the open-ended question associated with the maximum WTP in order to explore deviant responses to the dichotomous choice question. When facing open-ended question, respondents who are confident of their WTP in the dichotomous choice question may answer consistently. Respondents who overstate or understate their WTP in the dichotomous choice question may, on the other hand, answer inconsistently.
The key of the potential anomaly between WTP values over the survey is the presence of anchoring bias, shift, and inconsistent response effects. To confirm our hypothesis that the respondents’ WTP over the survey will be significantly influenced by the potential preference anomalies, our CVM data are transformed into a panel data structure following Whitehead (2002) [
25] in iterative valuation questions. The econometric model for respondent
, who is observed at several time periods
, can be formulated as:
where
is the intercept.
,
, and
are the shift, anchoring, and inconsistency parameters, respectively.
is the maximum WTP amount from open-ended questions at the last stage of the survey.
, where
is the individual specific error term (random effect) which varies across respondents but is time invariant. It explains the WTP due to the respondent’s unobservable characteristics.
is the random error term which varies across time and respondents. With the assumption that both error terms are independently and identically distributed with mean zero
,
in the observed
which is located in interval, lower and upper bounds, denotes a dummy variable with the value of one
with follow-up questions in the double-bounded contingent valuation survey and zero otherwise [
25].
If the anchoring bias exists, the anchoring parameter will be positive (0 ) and statistically significant. If the shift effect is present, the shift parameter will be negative () and statistically significant. If the inconsistent response effect exists, the inconsistency parameter will be positive () and statistically significant. The correlation coefficient between the answers is a measure of the ratio of the variance of the panel-level variance component in the model. In this study, the random-effects interval-data regression models in Stata (command “xtintreg”) are used with the panel data. To focus on the examinations of the preference anomalies, socio-demographic variables are not included in the model.
5. Benefit Calculations
Final focus of this study is the calculation of the benefits generated by water quality improvement due to the implementation of the highland agriculture restriction policy in the Han River basin. Before the benefit calculation, we need to define who these benefits from the policy belong to, or who the beneficiaries are. In South Korea, the Han River basin is a primary source of drinking water supply as well as providing many tangible and intangible benefits to its mid- and downstream areas. Based on the benefits provided by the Han River, the mid- and downstream areas have been economically developed (urban or metropolitan areas) while the upstream areas have not (rural areas) [
17]. Although the water use charge has been, since 1999, implemented for supporting communities and their people in the upstream areas and water quality improvement programs in the basin, some problems pertaining to the distribution of the benefits still remain along with frequent turbid water discharge problems.
The implementation of the highland agriculture restriction policy aiming at water quality improvement patently restricts economic activities of the upstream residents including farmers. Instead, the mid- and downstream residents are entirely benefited by the policy for the improvement of water conditions. Based on this circumstance, we calculate the total benefit generated by the highland agriculture restriction policy and compare the benefits to the costs associated with land use policies to protect and improve water quality in the basin.
The result of calculated benefits to the mid- and downstream areas obtained from the land use restriction policy in the upstream areas is shown in
Table 5. Based on the population provided by Statistic Korea in 2013 [
87], approximately 8.7 million households live in the mid- and downstream areas and the total benefits are calculated to be around KRW 297.73 billion per year. The downstream residents had the highest benefits at around KRW 156.20 billion per year and the midstream residents’ benefits were around KRW 141.53 billion per year (see
Table 5).
We made a comparison of these total benefits with the costs associated with land use policies to protect and improve water quality supported by the water use charge. The water use charge is mainly used for community support programs in upstream areas of the basin, upstream farmland purchase and riparian zone management, construction and operation of waste treatment facilities, etc. We considered the costs of the upstream farmland purchase and riparian zone management as a comparison item with the total benefits. In 2013, the costs were around KRW 129.44 billion and accounted for 29.8% of the total charge, the second largest proportion after the construction and operation of waste treatment facilities.
Table 6 shows the results of benefit–cost comparison. The net benefit is around KRW 168.29 billion (see
Table 6).
The costs related to the upstream farmland purchase and riparian zone management in 2013 increased double compared to that in 2012 [
88]. This indicates that, to prevent the high soil erosion from highland agricultural fields, as a prime pollutant, from inflowing to the basin, the investment cost of purchasing upstream farmland has gradually increased. However, many of the upstream lands purchased (non-farming areas) are not relevant to the highland agriculture. Since the highland farmers who actually earn their income from such summer crop production have deep concern for their heavy income loss, most of them do not want to give up farming in the highlands.
To improve the negotiation for practical purchase of the high mountainous agricultural fields, valid compensation for the highland farmers’ income loss should be a high priority. To realize this, there is a need to increase the unit cost of the highland purchase, which means more costs should be invested in the highland purchase programs.
Operational problems of the water use charge along with frequent turbid water discharge problems in the basin exist. Wasteful and inefficient fund use for water quality control, e.g., overinvestment in waste treatment facilities and temporary expedients for supporting upstream communities, has been criticized by all local communities in the Han River basin [
14,
89]. If these inefficiently used costs could be invested in other items such as the highland agriculture field purchase and riparian zone management, problems in terms of financing would be to some extent resolved.
6. Conclusions and Policy Implication
This study aims at: (1) examining potential preference anomalies such as shift, anchoring, and inconsistent response effects when the double-bounded dichotomous choice question format is used in the contingent valuation survey; (2) eliciting WTP of the respondent for the highland agriculture restriction policy on water quality improvement in the Han River basin, South Korea; and (3) comparing the total benefits from the policy to the total cost of land use restriction policies to improve water quality. Before implementing the land use policy, it is necessary to examine the preferences of residents for the policy. This result could be used to value the outcome (i.e., change in utility/welfare of individual water users through water quality improvement). However, the use of water as an environmental (or non-market) good frequently accompanies non-priced side effects (i.e., environmental externalities). Therefore, the contingent valuation method could be used in order to elicit the preferences (WTP) and carry out economic valuation for the water policy making. When respondents are, however, faced with new or unfamiliar environmental goods or services, they are likely to experience uncertainty [
90] such as systematic WTP response bias [
32,
85], which is caused by a lack of experience with market for non-traded goods [
22]. Thus, preference anomalies of respondents may exist and bring about incorrect assessment of the water policy.
In this study, these potential preference anomalies are tested by the random-effects interval-data regression models. The empirical results indicated that significantly anomalous preferences are presented in our survey data. As the shift, anchoring, and inconsistent response effects were corrected in order, the statistical precision of parameter estimates was also improved. After correcting the potential preference anomalies, estimated welfare gains are on average KRW 2,861 per month per household. Based on the WTP estimate, the total benefits from the highland agriculture restriction policy are around KRW 297.73 billion and the total costs are around KRW 129.44 billion. The net benefit is, thus, around KRW 168.29 billion.
In order to make practical land use restriction policies, the valid compensation for the highland farmers’ income loss is necessary and this could be realized through increase in the unit cost of the highland purchase. In terms of financing arrangement, wasted or inefficiently used costs (e.g., overinvestment in waste treatment facilities, and temporary upstream community support) should be spread across other cost items, in particular over the purchase program of the high mountainous agriculture fields. The results of our analysis provide South Korean legislators and land use policy makers with useful information for the approval and operationalization of the policy.
As stated by the Millennium Ecosystem Assessment [
91], water bodies provide various ecosystem services such as food provision, biodiversity, recreation, tourism, amenities, drinking water, etc. to society. In this study, we consider only one service, water quality improvement generated by land use restriction policy. The total benefits estimated from our analysis are also associated with the water quality improvement due to the implementation of the policy.