What does willingness to pay measure?

Transcription

1 What does willingness to pay measure? Mark Sagoff Ins:tute for Philosophy and Public Policy School of Public Policy University of Maryland, College Park

2 WTP measures preference not welfare or well being WTP and WTA are measures of human preference. That human preferences should count and be sovereign is the fundamental value judgment in CBA. (Pearce 1998: 87) CBA is seen as an empirical test of whether proposed public ac:ons would increase preference sa:sfac:on. (Kontoleon et al. 2002: 189).

3 Why should preferences count? Why is it a good that preferences are sa:sfied preferences ranked by WTP or WTA and taken as they come? Appeals to concepts of economic value such as welfare and benefit are empty and irrelevant, since they are themselves defined as WTP. Even if for some reason preferencesa:sfac:on is a good thing, why is it the job of government or even relevant to public policy?

4 Facts vs. Defini:ons An empirical correla:on, such that between smoking and lung cancer, states a testable fact about the world. A s:pulated defini:on, such as between triangles and three sided enclosed figures, states a logical equivalence. The proposi:on that WTP measures economic value s:pulates a logical equivalence or defini:on but does not state a testable fact.

5 The founda:on of cost benefit analysis is not welfare, which is not measurable, but individual preference. (Zerbe et al. 2006b) The terms welfare or benefit in CBA mean the same thing as WTP or preferencesa:sfac:on. Welfare does not explain the value of WTP. Since welfare means WTP, the statement, WTP measures welfare reduces to the statement WTP measures WTP. CBA rests on a tautology.

6 Why does this ma`er? Because economic value and its aliases (such as benefit ) are logically equivalent to preference sa:sfac:on, economists cannot (and generally do not) base the value of preference, WTP, or preference sa:sfac:on on anything but itself. The value of preferencesa:sfac:on is treated as a given and is not explained or jus:fied in terms of a concep:on of u:lity that is independently measured.

7 This thesis is generally accepted by economists In terms of states O 1 and O 2 the economic view makes preference sa:sfac:on both necessary and sufficient for welfare. It says that P is be`er off in O 1 than in O 2 if and only if P prefers O 1 to O 2. Welfare improving states are those, and only those, that the subject prefers. Adler and Posner (2006: 33).

8 Economists s:pulate the equivalence of economic value or benefit and WTP. economists take welfare to be the sa:sfac:on of preferences (Hausman and MacPherson 2006: 92). U:lity merely indicates preference ranking. It is not something people seek Hausman and McPherson (2009: 5) economists tradi:onally... reduce welfare to preference sa:sfac:on. (Adler and Posner 2006: 33)

9 That WTP = benefit is textbook microeconomics Benefits are the sums of the maximum amounts that people would be willing to pay to gain outcomes that they view as desirable. (Boardman et al. 1996) any good for which there is a willingness to pay or accept count[s] as an economic good... (Zerbe et al. 2006a : 449). Measures of economic value are designed to reflect the difference that something makes to the sa:sfac:on of human preferences. (Farber et al. 2002: 379)

10 WTP measures WTP and nothing else WTP measures welfare, well being, u:lity, or be`er offness in other economic value. The concepts welfare well being, u:lity, and be`er offness all aliases of economic value are defined by and mean nothing more than the concept WTP. Therefore WTP measures WTP and nothing else.

11 Is WTP related empirically to any concep:on of welfare or value? Two familiar arguments show that WTP has no empirical (factual, testable) rela:on to an any concep:on of welfare or economic value: [1] that preferences are not always selfinterested and [2] that false beliefs may lead people to prefer what is worse for them even when people are self interested. Therefore, it is a mistake to regard welfare as deriving [empirically] from preference sa:sfac:on (Hausman and MacPherson 2009: 1, 2)

12 A third argument to show that no empirical rela:on holds between WTP and welfare Consider a person P at :me t1 who prefers state A rather than state B to occur at t2, some future :me. Suppose that contrary to this preference, state B occurs. At t2, P lives in the possible and actual world in which state B occurs. Let us call Pb this self of P. Query: Is Pb be`er or worse of than Pa, who would have existed in some counterfactual world in which A rather than B takes place?

13 The best of all possible worlds Let us assume that the life of Pb is worth living even given the occurrence of state B which P did not prefer. Pb must be be`er off than Pa i.e., the counterfactual self in the A world that did not happen because Pa does not exist and it is be`er (from the perspec:ve of well being) to exist rather than not. Within broad limits, whatever happens makes P be`er off than an alterna:ve that does not happen. This is true because the self of P that experiences the alterna:ve state does not exist and thus has no wellbeing to which that of the actual P can be compared.

14 Either outcome is welfare maximizing; existence trumps preference

15 Intrapersonal or intra subjec:ve comparisons of u:lity are impossible Consider P aner :me t2, i.e., P aner B rather than A occurs. Pb can no be`er compare intersubjec:vely his well being with that of Pa the self who would have occurred if state B had happened than Pb can compare his wellbeing with that of any other person. If interpersonal comparisons of u:lity are impossible, intrapersonal comparisons of u:lity are impossible as well.

16 The problem of personal iden:ty across possible worlds It is true that Pa and Pb are alterna:ve selves of P and thus iden:cal to P and to each other. As Velleman (2008: 241) following Parfit (1984: 151) argues, however, iden:ty is not what ma`ers. What ma`ers is a person s ability to care about and thus subjec:vely feel his way into a possible self in some non actual world. We lack the ability to intuit and compare the lives of alterna:ve selves we can longer choose to be as we lack to ability to intuit the lives of others.

17 WTP has no empirical or testable connec:on with well being or benefit People onen prefer outcomes that have nothing to do with what they think benefits them or makes them be`er off. Even when people intend their own well being their preferences are onen uninformed. Intra subjec:ve comparisons of u:lity are impossible. Whatever happens is the best outcome for the individual since it creates the life he has.

18 Two ques:ons for CBA Given that preference sa:sfac:on (or WTP) has no empirical or testable rela:on to welfare or well being, why is it valuable or an indicator of value? Even if WTP is norma:ve for some reason, why should preference sa:sfac:on be the goal of government rather than (as libertarians would make it) wholly the responsibility of individuals themselves under a rule of law?

19 Is it your responsibility or that of the state to sa:sfy your preferences? The government should assure basic needs, provide security, and perhaps provide merit goods, but absent an empirical rela:on between preference sa:sfac:on and wellbeing, why should the government seek to sa:sfy preference per se preference measured by WTP and taken as it comes? Is preference norma:ve? How? Why?

20 References Adler, M. and E. Posner New founda:ons of cost benefit analysis. Cambridge, MA: Harvard University Press. Farber, S., Costanza, R., Wilson, M., Economic and ecological concepts for valuing ecosystem services. Ecological Economics 41, Hausman, D. and M. McPherson Economic analysis, moral philosophy, and public policy. Cambridge: Cambridge University Press. Hausman, D. and M. McPherson Preference sa:sfac:on and welfare economics. Economics and Philosophy 25: Kontoleon, A., Macrory, R. and Swanson, T Individual preference based values and environmental decision making: Should valua:on have its day in court?, Research in Law and Economics, 20: Parfit, D Reasons and Persons. Oxford: Oxford University Press. Pearce, David Cost benefit analysis and environmental policy. Oxford Review of Economic Policy 14(4): Velleman, D Persons in prospect. Philosophy and Public Affairs 36: Zerbe, R. O., Jr., Y. Bauman, et al., 2006b. "A preference for an aggregate measure: A reply to Sagoff." Ecological Economics 60(1): Zerbe, R.O. Jr., Bauman, Y., Finkle, A., 2006a. An aggregate measure for benefit cost analysis. Ecological Economics, 58,