The WTA-WTP Gap and Welfare Measures for Public Goods

12 Pages Posted: 11 Sep 2009

See all articles by Philip E. Graves

Philip E. Graves

University of Colorado at Boulder - Department of Economics

Date Written: September 9, 2009

Abstract

A robust finding in experimental economics is that decision-makers often exhibit a much smaller dollar willingness to pay (WTP) for an item than the minimum amount that they claim to be willing to accept (WTA) to part with it. The spread between these two numbers is particularly large for public goods, raising serious public policy concerns regarding which number, if either, is appropriate for valuing such goods. A number of explanations for this phenomenon have been advanced, each perhaps of relevance in particular settings, with little consensus being achieved as to whether any explanation satisfactorily resolves the problem. The traditional utility maximizing model presented here that demonstrates that conventional estimates of WTP exhibit a potentially large downward bias. Conventional welfare analysis implicitly assumes an initially optimal combination of leisure, private goods, and public goods when an increment to public goods is being contemplated. However, the initial combination will be sub-optimal in general, involving some mix of too much leisure and too many private good substitutes for the under-supplied public good. Welfare measures for increments to a public good, as currently practiced, are generally incorrect, undervaluing public goods by a potentially large amount.

Keywords: Decision making, Choice behavior, Public Goods, Willingness-to-pay, Willingness-to-accept, Welfare, Compensating Variation, Equivalent Variation

JEL Classification: C91, D12, D81

Suggested Citation

Graves, Philip E., The WTA-WTP Gap and Welfare Measures for Public Goods (September 9, 2009). Available at SSRN: https://ssrn.com/abstract=1471060 or http://dx.doi.org/10.2139/ssrn.1471060

Philip E. Graves (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States

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