Question

1. You read the results of a contingent valuation study reporting an economic value of $500 per person for a program designed to reduce water pollution by 50% in a local river. The dichotomous choice study asked how much respondents would be willing to accept for a 50% increase in water pollution. Previous estimates of the economic value of the 50% water pollution reduction reported $100 per person. Why might this new study report an economic value 5 times that of previous estimates?

Answer 1

Here we must take into consideration two concepts, willigness to accept (WTA) and willingness to pay (WTP)

Willingness to accept means how much money we have to give to a person experiencing a reduction in quality of environmental resource, here water,due to an increase in water pollution. Here, the WTA is $500. This is the amount which the person need in order to keep his utility same as before.

Now, willingness to pay means the amount the person is willing to give in order to reduce the level of pollution and keep his utility the same. This gives us the amount the individual is ready to pay for the improvement in quality of the environmental resource (here , water). Here, WTP is $100.

The new study estimates the WTA and the previous study is based on WTP. Generally, WTA is greater than the WTP. This is because, the people normally count losses than the gains.

That is why the new study report the economic value 5 times that of the previous one.