Question

What are the advantages and disadvantages of using willingness to pay as a measure of value? What are some alternatives? (In Essay Format). I know the difference, but having a hard time putting it in an essay format.

Answer 1

Advantages of using willingness to pay as a measure of value :

In contingent valuation method, a flexible tool is to be used to analyze specific policies and to measure WTP for an attribute or quality change . It collects data directly from consumers, doesn't rely on secondary data. Moreover, it is less expensive and easier than experiments.

In experimental auction method, It measures more accurate WTP than CV method , using real money to remind subjects of their budget constraints . It is based on behavior rather than intentions. It has control direction external distractions and strategic behavior. Also there is an absence of non-response bias.

Disadvantages of using willingness to pay as a measure of value :

There is always a problem of overvaluation due to general lack of considering budget constraints , the stated WTP is higher than actual paying and there is large divergence between consumers ' statements and actual behavior . There is variation in WTP responses. Inconsistencies between closed ended( or dichotomous choice) and open ended responses have to be faced. Also it is vulnerable to sample and question format bias.

In experimental auction method, it costs higher per respondent than CV. Geographical and regional restrictions are always on samples. Moreover , there are huge differences between behaviors in the lab and in real life due to artificial settings of experiments .