CVM is essentially a method which provides values (in terms of willing to pay (WTP) or willing to accept compensation (WTA)) of the concerned people for an environmental good as stated by them during a survey. Rather than prices actually paid or received, WTP and WTA are used because many of the project impacts that are to be included in the economic analysis will be unmarketable, for example, biodiversity preservation, or incompletely marketed, such as water supply and sanitation benefits.
Willingness to accept compensation (WTA): Sometimes, construction of a flood management project results in the loss of income or other amenities to people. This happens in the case of those whose land or property is acquired by authorities for the construction of the project, say a reservoir. The affected people in such cases would like to receive compensation so as to induce them to part with their property. The minimum amount that they would be willing to accept as compensation is regarded as a measure of the value of loss suffered by them. WTA like WTP is also dependent on the income of an individual.
Willingness to pay (WTP): People derive benefit from something which they prefer to have. Preferences, of course, differ from person to person. But there is a good degree of commonality also so that an idea of average preferences for the whole community or a country can be derived. If people prefer something because they derive satisfaction from its use, then they are prepared to pay a price for it. How much a person or a nation is willing to pay for a good or a service that is preferred by them is the true measure of its value or of the benefit derived from the concerned item. WTP is partly dependent on the income of an individual. This WTP for something also determines the prevailing market price if there are no distortions in the market.