Economics Dictionary of ArgumentsHome
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| Willingness to pay: Willingness to pay (WTP) is the maximum amount an individual is prepared to spend on a good or service. It reflects the value a consumer places on a product, determining how much they are willing to sacrifice to acquire it. WTP is crucial in setting prices and can be influenced by personal preferences, income, and alternatives available. See also Preferences._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Amos Tversky on Willingness to pay (WTP) - Dictionary of Arguments
Parisi I 358 Willingness to pay/Tversky/Kahneman: For example, considered as a whole, most of the wages of college football coaches is economic rent since, were their salaries lowered en masse, they would be unlikely to leave for other jobs. The measures correspond to willingness to pay (WTP) for gains and willingness to accept (WTA) payment to bear costs, which measures are consistent with the psychological (utility) effects associated with prospect theory, which is steeper for losses than gains, convex in losses, and concave in gains (Tversky and Kahneman, 1992)(1). They thus have an intuitive appeal and are consistent with the goal of BCA, which is to give those same values markets would give were prices available. The differences in values between the WTP and the WTA payment can be large, and are larger the more expensive the good (income effects) and the more unique the good (substitution effects). The differences would be very large, then, in estimating the value of the Grand Canyon, which is unique and also highly valuable, or in determining the value of a right to an abortion. For goods of less value or uniqueness whose value is captured by markets, the WTP and WTA values are the same for small changes in quantities. In practice both benefits and costs are often measured solely by the WTP on grounds that the WTA is more difficult to measure. In general practice the WTP is usually approximated by the change in consumer or producer surpluses. This can be an important source of error for goods in which the discrepancy between the WTA and WTP measures are large. The basic BCA test has been the Kaldor–Hicks (KH) test, which uses the sum of the CVs. This test sums benefits as measured by WTP for them and subtracts from them the sum of costs, which is the WTA compensating payment for losses. KH is satisfied when the gains are sufficient to hypothetically compensate the losses so that it is also referred to as the “potential compensation test” (PCT). >Efficiency/Kaldor, >Efficiency/Hicks, >Cost-benefit analysis/Zerbe. 1. Tversky, A. and D. Kahneman (1992). Journal of Risk and Uncertainty 29. Richard O. Zerbe. “Cost-Benefit Analysis in Legal Decision-making.” In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Parisi I Francesco Parisi (Ed) The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017 |
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