In an environmental economics course or discussions about the value of environmental and natural resources, WTP is a frequently repeated acronym. WTP is actually an acronymn that stands for the phrase "Willingness-to-Pay".
What is the Willingness to Pay Concept?
In economics, willingness to pay is defined as the maximum amount of money that a consumer of a good or service is willing and able to give up, sacrifice or exchange to obtain that good or service. It is also the amount a person is willing and able to spend to prevent or avoid something that threatens his well being.
Environmental economics arose as a new field or branch of economics due to the recognition of the role of the environment in the workings of the economy. In the context of environmental economics, therefore, the good or service in question is an attribute of the environment or a natural resource.
Example to Illustrate WTP
To illustrate the WTP concept in the context of environmental economics, clean air as an environmental good is taken as an example. Clean air is an environmental attribute that contributes to the welfare of society, thus it is essentially a public good. A public good is a good that is available to everyone.
How much then are the people willing to pay to avail or enjoy clean air? The amount of money that they are willing and able to give up, then, will be their WTP.
The stated amount to reflect WTP for clean air can vary across individuals because people have different perceptions about the value or importance of clean air to them. This also depends on the amount of money they have or their wealth. Thus, an individual's WTP is governed by two things: 1) their values and attitudes towards the good or service, and 2) their wealth.
Use of WTP in Decision Making
Economic valuation is a tool used in environmental economics that assigns monetary value to environmental goods and services that are normally not accounted for in conventional financial analysis to aid decision makers. When the value of the goods and services are taken into account, the term used is economic analysis.
In the above example about clean air, many people have the mistaken notion that this environmental good is free because no one actually pays for it. Besides, clean air is not yet part of the public goods subject to the supply-demand nature of the market (at least at this point in time because water, once considered free, is now sold in plastic bottles). Once air pollution sets in, people then realize that clean air, indeed, has value.
There is no straightforward way by which the value of clean air can be determined because nobody sells clean air as a public good; so people's WTP for clean air can be used to estimate the value of this environmental good. A survey using a method of economic valuation such as Contingent Valuation Method (CVM) may be used to find out how much this environmental good is. The information derived from this estimate is important in decision making, particularly on those issues confronting policy makers where their decisions will impact on air quality.
For example, will the government administrators allow the construction of a pollutive factory within their jurisdiction? If the principles of environmental economics are applied in the analysis of alternative options, then the benefits and the costs (including the environmental costs such as air pollution) associated with its construction and operation will have to be determined. If the benefits far outweigh the costs including the environmental costs such as air pollution (loss of clean air), then the decision makers may decide in favor of the factory.
Jesdapipat, S. n.d. Willingness to Pay (WTP). Retrieved on July 7, 2012 fromhttp://www.adpc.net/ece/ACT_man/CT-4.2-WillingnesstoPay.pdf
King, D. M. and M. J. Mazzota. 2000. Basic Concepts of Economic Value. Retrieved on July 7, 2012 from http://www.ecosystemvaluation.org/1-01.htm
© 2012 July 11 Patrick A. Regoniel, PhD