Let me try to explain the problem I see with enforcing the WTP. Assume I am a simple person (well I am quite a simple person, but not quite that simple :-)), who buys three things each week: milk, bread, and a newspaper. I also read Medium posts, but these are free. My income is £10/week, and I spend it as follows: £2.50 on the paper, £3.00 on bread and £3.50 on the milk. I save £1.00. Now, I consider that I actually get £3.20 worth of value out of the paper; also, I would be willing to pay £4.00 for the bread, and for the milk. My part of the surplus of each transaction is therefore £2.20 — I pay £9.00 and get £11.20 worth of value.

But the total of my WTP exceeds my income by £1.20. So if I were forced to pay the total amount I am willing to pay for everything I buy, I would run out of money before I have bought everything I need. While the individual WTP might make sense (and would be interesting and important information for would-be suppliers), it ceases to be useful in aggregate.

In a market, the WTP is generally not revealed, because for each WTP there is the equivalent at the seller’s side — the willingness to accept (WTA). Both matter in a transaction, and there is no particular reason why any amount in the range between the WTA and the WTP is more appropriate than any other.

Returning to our dinner together: if I am willing to pay a certain amount to get my preference, that is not necessarily the amount that I should pay. A completely equivalent situation would be where we would say how much each of us would be willing to accept not to get our preference. So imagine this. I would love to have an authentic Mexican meal, but at the same time, if you are keen on an Indian, I’m happy to indulge you, and I wouldn’t want any payment in return. You fancy an Indian but not that much, but you’re really fed up with Mexican food having had it every day for the last month, so you’d really need a substantial amount to have it yet one more time.

You: WTP to eat at an Indian restaurant = \$5; WTA to eat at a Mexican = \$25
Me: WTP to eat at a Mexican restaurant = \$25; WTA to eat at an Indian = \$0

What would this yield? The Mexican option is the worst, because there is no surplus, despite the high price I am willing to pay. The Indian option produces a surplus of \$5. What should happen to the \$5? Well, not necessarily anything. By revealing our WTP and WTA we can establish what is the option that produces the highest overall welfare. As long as the WTA requirement is satisfied, the route with the highest surplus is to be preferred. In this particular case, I’d be happy with no payment, so the surplus could stay with you entirely. If I wanted \$1, then that’s what you’d pay me, and you’d still be the better off of the two of us.

(I need to go now, but will respond to the rest of your message later — at least you’ve already got something to think over! ;-)

Written by