The Economic Theory of WTP and WTA

W. Michael Hanemann

in Valuing Environmental Preferences

Published in print November 2001 | ISBN: 9780199248919
Published online November 2003 | e-ISBN: 9780191595950 | DOI:
 The Economic Theory of WTP and WTA

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The aim of this chapter is to examine the properties of welfare measures under alternative preference structures for q (the item being valued) and to identify the observable implications for measured WTA (willingness to accept) or WTP (willingness to pay), whether measured through indirect methods based on revealed preference or direct methods such as contingent valuation. Section 3.2 sets out the basic economic model of individual utility, Sect. 3.3 then reviews how WTP or WTA vary with the magnitude of the perceived change in the item being valued, and Sects. 3.4 and 3.5 deal with how WTP and WTA vary with the individual's income. Sect 3.6 deals with the theory of the disparity between WTP and WTA, and Sect. 3.7 considers a related phenomenon – the disparity between values for gains and losses. Section 3.8 reviews some other explanations of the gain/loss disparity that have appeared in the literature, including prospect theory and the concept of loss aversion, and Sect. 3.9 reviews explanations based on models of individual behaviour under uncertainty, including uncertainty about preferences or what the item might be worth. Section 3.10 touches on substitution and complementarity among alternative qs and how this affects WTP and WTA, and conclusions are summarized in Sect. 3.11.

Keywords: complementarity; contingent valuation; disparity; economic theory; gain/loss disparity; gains; income; losses; preference; prospect theory; substitution; uncertainty; willingness to accept; willingness to pay

Chapter.  27950 words.  Illustrated.

Subjects: Economic Development and Growth

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