Question

come up with the scenario where housing could give us a WTP to avoid pollution from a nearby coal power plant and a scenario where we could undercover the necessary payment people would be willing to accept to tolerate the coal plant nearby.

Answer 1

The pollution is produced by coal power plant which negatively impacts the people residing in the houses nearby coal power plant. The pollution has no market which is why it is difficult to compute the pollution price and preferences of the consumer.

Thus, the willingness to pay or accept (WTP or WTA) can be determined with the help of a revealed preference approach. Let consumer has preference function, that is, utility function over the numeraire good (x) and (q) quality of air ( higher the level of quality of air, less is pollution). Assuming the preference function is usually form, that is diminishing utility function. And better the quality of air (that is, lower the level of pollution) higher the utility to the consumer. The house resident willingness to pay and accept is computed in terms of numeraire good which is plotted on y-axis and quality of air on the x-axis which is shown in the diagram below -

It is shown in the diagram above that WTA is depicted by AB and WTP is depicted by CD. The better quality of air(that is, q₁) higher is the utility, that is, u₁.

Let initially resident is consuming a level of q, that is, q₀, and the numeraire good x₀ (corresponding to point B on u₀(q₀,x) in the diagram). Thus, reducing the level of pollution, that is, improving the quality of air to q₁ the resident move from B to C, that is a higher level of utility u₁ from the initial level u₀. Thus, to remain on the same utility curve u₀(q₀,x)the individual has to give up some units of numeraire good, that is depicted by CD which is the Willingness to pay to improve the quality of air, that is, to reduce pollution produced by coal plant nearby.

Similarly, the resident's initially enjoying a q₁ level of quality of air, x₀ level of numeraire good corresponding to point C on the u₁(q1, x) utility curve. Thus, if the quality of air is reduced to q₀ then it will reduce utility to resident to u₀ and move from C to B. Therefore, to maintain initial level of utility (u₁) resident wants more of numeraire good which is depicted by AB, that is, willingness to accept to tolerate coal plant nearby (that is lower level of quality of air q₀).