Question

Short Answer:

(a) Define willingness to pay (WTP) and willingness to accept (WTA) and (b) explain why it is likely that these may not be equal. (There are several different explanations for this difference – you just need to provide one of these.)

Keywords: Econ, economics, environmental economics

Answer 1

a) Willingness to pay is the rate of money which is a consumer is ready to pay for consuming a definite unit of product. Discrete choice analysis is used to measure the willingness to pay of consumer. This willingness to pay criteria will determine the best price for a commodity which should be selling in the market. The willingness to pay was determined by different factors like state of the economy, trend of the economic conditions, consumer’s price preference points, circumstantial needs of customers, quality of the product etc.
The minimum amount of money which a producer is ready to accept by selling their products is termed as willingness to accept. Sometime adding or put up with some negative factors like pollution. This will be contrast for willingness to pay. Choice modelling techniques were used to measure the willingness to accept by the sellers.
b) Both of these terms were used to find the welfare of the economy as a whole under contingent valuation method. Willingness to pay and willingness to accept was differ in the sense of income effect. The difference between both of these will be based on the degree of substitutability between the ordinary market goods and non market commodities. On the other hand, the difference will be based on the information available and accessible for both producers and consumers. If there is less information were available, the greater the bias and the ratio between WTA and WTP are higher. In case of loss aversion, the WTA will exceed the WTP.