Wednesday, July 2, 2008

The paradox of "willingness to pay" surveys

Development experts, consultants and even policy makers justify the charging of higher prices on civic, public and certain welfare services based on the results of "willingness to pay surveys". These surveys document the opportunity costs incurred by the citizens in accessing these services with poor quality (and even not accessing it). The cumulative of all these costs are then quantifed and assumed to be the true cost citizens are willing to pay to access the same service of good quality.

Thus, in the absence of access to piped supply of clean drinking water at their homes, poor people incur large opportunity costs by way of having to transport water from large distances, spending valuable time in fetching or catching water, ill-health by consuming poor quality water, and even buying drinking water from local private providers. The respective costs of each of these are quantified and cumulated to calculate the amount these poor people are willing to pay for accessing piped water supply.

While this may be true from an accounting perspective, it may be off the mark when dealing with real human beings in the real world. As behavioural economists will claim, people tend to inherently undervalue the amount of work they do themselves and not attach monetary value to their times wasted thereon. Such cognitive biases are inherent part of human nature and cannot be wished away, and are intergral part of the decision making process of any rational economic agent.

Therefore, while the poor person does indeed struggle and incur considerable opportunity cost in accessing water, this does not automatically translate into full willingness to pay the equivalent amount. In fact, it is quite possible that much less pay the full quantified opportunity cost, the poor person may not be willing to pay anything to access the supply. Behavioural economists attribute this to people's unwillingness to pay for something which they ordinarily access without paying, whatever the convenience associated with it.

So it may be too optimistic to read too much into willingness to pay surveys that quantify the opportunity cost incurred by people who lack access to safe drinking water or sewerage facilities or public transport or assured electricity supply, and use this to justify charging higher tariffs or selling the proposal for increasing tariffs.

The most recent example of this comes in the form of an article by Tyler Cowen.

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