2.1 METHODOLOGY OF WILLINGNESS TO PAY APPROACHES
Willing to pay (WTP) is a measure of value based on the premise, central to economic theory, that the value of a good is simply what it is worth to those who consume it or benefit from it. The amount an individual is willing to pay for a particular good may be higher or lower, than the cost of that good (Cunningham, K. 2010).
Willing To Pay is one of the two standard measures of economic value. It is the appropriate measure in the situation where an agent wants to acquire a good. Minimum Willingness to accept (WTA) compensation is the appropriate measure in a situation where an agent is being asked to voluntarily give up a good. Both of these measures are Hicksian consumer surplus measures and are often defined net of the price actually paid or received. Whether WTP or WTA is the correct measure depends upon the property right to the good. If the consumer does not currently have the environmental good and does not have a legal entitlement to it, the correct property right is WTP.
If the consumer has a legal entitlement to it and is being asked to give up that entitlement, the correct property right is WTA. For marketed goods, theoretically the difference between the two measures should generally be small and unimportant as long as income effects and transaction costs are not large. For non marketed goods, this may not be the case as the difference between WTP and WTA is also dependent upon the substitutability of the non-marketed good for goods available on the market (Carson, 1999).
The Cost of Illness (COI) approach employing the human capital augment is questioned on the grounds of whether production is an adequate or ethical measure of human value and whether earnings is an adequate measure of production. This is because people‟s earnings do not always accurately reflect their ability to produce. The willingness to pay (WTP) approach has therefore been advanced as an alternative to address some of these limitations. This approach considers the amount people are willing to pay to avoid or decrease their risk of injury, disease or death so as to keep alive and healthy.
The WTP approach has the advantage of quantifying all costs of illness to society, including the intangibles (WHO 2001). An important issue that is addressed by the WTP approach is that it accounts for consumer behavior in purchasing goods and services.
The fundamental framework underpinning the WTP concept is the „value theory‟. An important assumption of the value theory is that consumers value their own consumption, e.g. good health and that they rationally seek to maximize the value of their consumption as best they can, subject to various constraints such as their income and price. It is expected that, rational people will be willing to pay to price that reflects the value they place on their health and life. The WTP therefore reflects individual preferences over health risks. It is known that individual preferences are unique and individual demands for risk reduction vary. This variation may depend on several factors including the level of risk, the type of risk and the socio-economic characteristics of the population including income differences. This means that income and circumstances could play a role in determining the size of willingness- to-pay estimates.
In making such a decision, people assess the pains and suffering associated with the particular condition. The values of lost productive and leisure time, among others and weigh them against the
There are different ways of eliciting willing to pay approach. They are the open- ended questions, payment card questions, closed ended questions and the bidding game. Close ended questions includes the referendum questions and the dichotomous choice questions. The dichotomous choice formats have the advantage of closely mimics our day to day markets decisions and reduces the incentives for strategic behavior. Range bias is unavoidable in the payment card format while it is also belief that starting point bias is inevitable in the bidding game format. However, Economist belief that dichotomous choice is free of such biases.
In dichotomous choice questions, each respondent accepts or rejects only one price. By varying the price in different subsamples, the mean Willingness to pay can be estimated. In open ended questions, the Maximum Willingness to Pay is elicited from each respondent. As it is difficult to state the maximum Willingness to pay directly, a bidding game is often used where the bid is raised or lowered until the Maximum Willingness to pay is reached. A disadvantage of using a bidding game is that it often leads to problems of starting point bias (i.e., the maximum willingness to pay is affected by the first bid in the bidding game). On the other hand, the bidding game gives more information from each respondent than the dichotomous choice question approach.
Economists have developed a variety of techniques to value nonmarket amenities consistent with the valuation of marketed goods. These techniques are based upon either observed behavior (revealed preferences) towards some marketed good with a connection to the non-marketed good of interest or stated preferences in surveys with respect to the non-market good. The stated preference approach is frequently referred to as contingent Valuation especially when it is used in the context of environmental amenities. The use of contingent valuation (CV) has engendered a heated debated between proponents and critics (Carson, 1999).