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Willingness to pay

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Willingness to pay

In economics, the willingness to pay (WTP) is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good or to avoid something undesired, such as pollution. This term stands in contrast to willingness to accept payment (WTA), which is the minimum amount an individual or company is willing to receive to give up a good or to accept something undesirable. A transaction occurs when the willingness to pay is more than the market price.

Several methods have been developed to measure consumer willingness to pay. These methods can be differentiated whether they measure consumers' hypothetical or actual willingness to pay and whether they measure consumer willingness to pay directly or indirectly.

Choice modelling techniques may be used to estimate the value of the WTP through a choice experiment.

Unlike WTA, WTP is constrained by an individual's wealth. For example, the willingness to pay to stop the ending of one's own life can only be as high as one's wealth, while the willingness to accept payment to accept the ending of one's life would be an extremely high number.

Formal definition

Let u(w, x) be an individual's utility function, where w is the person's wealth and x is a variable that takes the value one in the presence of a good and takes the value zero in the absence of that good. The utility function is assumed to be increasing in both wealth and x. Also, define w0 as the person's initial wealth. Then the "willingness to pay", denoted WTP, is defined by

u(w_0 - WTP , 1) = u(w_0 , 0).

Thus WTP is the amount of payment which, combined with the presence of the good, gives the person the same level of utility as would occur if there were no payment and no acquisition of the good.

Economic valuation of soil information has been also applied for estimation of the willingness-to-pay (WTP) of potential users of the digital maps and their features. Farmers and researchers are Willing To Pay (WTP) for maps of high resolution and accuracy that offer map interpretation in addition to a number of soil properties.

The concept extends readily to a context of uncertain outcomes, in which case the utility function above is replaced by the expected value of a von Neumann-Morgenstern utility function.

See also

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