willingness to pay -...

Chapter – 5 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 is willing to receive to give

up a good or to accept something undesirable. Three methods are available 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.

The three methods considered are the contingent valuation (CV), cost of illness (COI)

and the defensive behaviour approaches. The CV approach, which involves asking

people what they are willing to pay to reduce/avoid the number of symptom days or

illnesses they experience as a result of exposure to pollution. The defensive behaviour

approach infers peoples’ WTP to reduce or avoid exposure to pollution from the

amounts of money they spend on precautionary action taken. The COI approach on the

other hand uses available data on medical expenditures and other costs (out-of-pocket

expenses), as well as opportunity costs (foregone earnings being the most obvious

example), to infer a lower bound to WTP to reduce pollution.3 Both these approaches,

unlike the CV method are indirect approaches used in inferring individuals’ WTP for

pollution control.

Contingent valuation is one of the most popular methods to assess the value of public

goods. It uses survey methods to elicit consumers preference by finding out how much

consumers would be willing to pay for specified changes in the level of provision of a

public good. Hence, in this study contingent valuation method of WTP has been used

as it is more favorable to Indian environment.

A stated preference method to measure WTP was based on CV. CV involves asking

individuals directly maximum amount they are willing to spend to have the commodity in

question. WTP estimates require a respondent to assess the prospects for expenditure

on the basis of prior and present day experience to consider the prospects of

eliminating the risk of infection given that the respondent have had recent experience

with the diseases (recently suffering for the diseases) or potential to assess future


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possibilities that is to consider the possible cost of becoming infected whether or not

they had any experience of the disease.

The respondents who had recently experienced the diseases when asked about the

willingness to pay to avoid another episode of the diseases which they were presently

experiencing were fairly certain about the economic and welfare losses associated with

the episode of illness such as expenditures for treatment of diseases, lost productivity

and disutility due to the disease. For evaluation of WTP the respondent were asked to

speculate a situation in which they would definitely be infected in the next year with one

which they have experience and then they were asked to how much they would be

willing to pay to avoid such condition. In this regard the respondents were given four bid

options as mentioned below in which they would like to invest for availing the benefits

package.

TABLE – 5.1

WILLINGNESS TO PAY BID OPTIONS

S.No BID AMOUNT BID

OPTED BENEFITS

1 Up to `1,000 482 Hospitalization, medical expenses, for the

period of 30 to 60 days.

2 `1,001 to `2,500

1571

Hospitalization (up to `1,00,000) Daycare

treatment, Local road Ambulance Services,

Hospital Daily Allowance Health Check

Cost, Income tax Benefit.

3 `2,501 to `5,000

563

Hospitalization (up to `2,00,000) Daycare

treatment, Local road Ambulance Services,

Hospital Daily Allowance Health Check

Cost, Income tax Benefit.

4 Above `5,000 268 Hospitalization (up to `3,00,000) Daycare

treatment, Maximum renewal upto 65 year,


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Local road Ambulance Services, Hospital

Daily Allowance Health Check Cost,

Income tax Benefit.

Out of 3,000 respondents 116 respondent were unwilling to pay amount to secure the

risk. Out of the remaining 2,884 respondent 1,571 respondent were willing to spend

between ` 1,001 to ` 2,500, a 563 respondent opted to spend ` 2,501 to ` 5,000, 482

respondent were eager to spend up to `1,000 and rest 268 respondent select the

highest amount bid of ` 5,000 and above.

TABLE – 5.2

WILLINGNESS TO PAY AS PER INCOME SIZE

HHI

BID’s

Up to `1,000

`1,001 to `2,500

`2,501 to `5,000

Above `5,000

Up to ` 50,000 31

(1.07%)

65

(2.25%)

10

(0.34%)

3

(0.10%) `51,000 to `1,00,000 88

(3.05%)

266

(9.22%)

28

(0.97%)

19

(0.66%) `1,00,001 to `2,00,000 338

(11.71%)

1153

(39.97%)

227

(7.87%)

60)

(2.11% `2,00,001 to `3,00,000 21

(.73%)

74

(2.57%)

161

(5.83%)

174

(6.03%) `3,00,001 to `5,00,000 3

(0.10%)

10

(0.35%)

130

(4.51%)

5

(0.17%)

Above `5,00,00 1

(0.03%)

10

(0.35%)

7

(0.24%)

0

(0.0%)

The respondent opting for various bids were further classified as per the household

income. It was found that the maximum respondents (338) opting for 1st bid i.e. up to ` 1,000 were from the income group of ` 1, 00,000 – ` 2, 00,000. Similar situation were


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found in the case of second and third bid. 1,153 respondent belonged to house hold

income of ` 1, 00,001 – ` 2, 00,000 for second bid and 227 respondent for the third bid.

However respondent opting for the last bid, the maximum respondent were from the

house hold income of ` 2, 00,000 – ` 3, 00,000. Respondent having the house hold

income of ` 5, 00,000 were least interested in WTP.


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TABLE – 5.3

WILLINGNESS TO PAY AS PER FAMILY SIZE

PERSON IN FAMILY WTP BID

Up to `1,000 `1,001 to `2,500 `2,501 to `5,000 Above `5,000

1 35 (1.21%)

6 (0.21%)

21 (0.72%)

7 (0.24%)

2 81 (2.81%)

34 (1.18%)

13 (0.45%)

17 (0.59%)

3 13 (0.45%)

85 (2.95%)

9 (0.31%)

14 (0.49%)

4 51 (1.77%)

524 (18.17)

161 (5.58%)

140 (4.85%)

5 101 (3.50%)

190 (6.59%)

261 (9.05%)

12 (.416%)

6 197 (6.83%)

411 (14.25%)

91 (3.16%)

34 (1.18%)

7 3 (0.10%)

142 (4.92%)

7 (0.25%)

21 (0.73%)

8 1 (0.03%)

136 (4.72%)

0 (0.0%)

21 (0.73%)

9 & Above 0 (0.0%)

43 (1.49%)

0 (0.0%)

2 (0.07%)

TOTAL 482 (16.7%)

1571 (54.4%)

563 (19.6%)

268 (9.3%)


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An attempt was also made to identify the WTP as per the family size (FS) of the

respondent. Maximum respondent (35) in their family wished to offer bid one i.e. ` 1,000. Similar situation was found in case of FS having two people (81). The

maximum respondent in the FS of 5 opted for bid three. Maximum respondent in the

FS 3 to 5 and 7 to 9 & above were also seen to opt bid second.

Thus the above analysis makes clear that inspite of increase in the family size the

amount of investment did not increase. Hardly any interest was shown for the

highest bids.

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