Chapter 12: Cost–Benefit Analysis and Willingness to Pay
12. Cost–beneﬁt analysis and willingness to pay 12.1 INTRODUCTION WTP is at the core of CBA and in this chapter we explain why this is so. WTP should be used when consumer sovereignty holds. Consumer sovereignty requires rationality and full information. When we explain the principles of WTP, and discuss applications, we will do so with the requirements of consumer sovereignty explicitly in mind. We start by aﬃrming how WTP relies on consumer sovereignty and go on to review the main methods for valuing WTP. Because WTP is constructed diﬀerently for some health care goods that are public goods, this diﬀerence needs explaining. Section 12.2 presents the welfare economic base to WTP in CBA. Section 12.3 deals with the special case where WTP is being used in the context of rationing by time rather than by price. The applications highlight the many considerations that need to be understood when using WTP for health care CBAs. 12.1.1 WTP and Consumer Sovereignty To maximize utility the individual equates PϭMU. The price that someone is willing to pay therefore measures the satisfaction from consuming a good. The total satisfaction, i.e., the beneﬁts, from consumption is the aggregate WTP for all units of the good. In most circumstances, both within and outside the health care ﬁeld, WTP is the correct approach to measure beneﬁts. Only this method is consistent with one of the fundamental principles of modern economics based on consumer utility maximization. With resources (income)...
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