Measuring the economic value of residential heat and hot water use using contingent valuation with an application of a mixture model

This study attempts to estimate the economic value of residential heat and hot water use. According to micro-economic theory, the economic benefit of residential heat and hot water consumed is the sum of the actual residential heat and hot water price and the additional willingness to pay (WTP) for the consumption. We apply the dichotomous choice contingent valuation method to assess the additional WTP. Moreover, a mixture model is applied to dealing with the zero WTP responses. The WTP distribution is specified as a mixture of two distributions, one with a point mass at zero and the other with full support on the positive half of the real line. The results show that the mean additional WTP for the residential heat and hot water is estimated to be KRW 5,775 (USD 5.6) per Gcal. Given that the average price of residential heat and hot water is KRW 90,845 (USD 88.1) per Gcal at the time of the survey, the economic benefit that ensues from the residential heat and hot water consumption is computed as KRW 96,620 (USD 93.7) per Gcal. This information can be beneficially utilized in conducting an economic feasibility study for a new project related to residential heat and hot water supply.