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Willingness to Pay Versus Welfare

Cass R. Sunstein

Harvard Law School

Harvard Journal of Law and Public Policy, Forthcoming
University of Chicago Law & Economics, Olin Working Paper No. 326
University of Chicago, Public Law Working Paper No. 150

Economists often analyze questions of law and policy by reference to the criterion of private willingness to pay (WTP), with the belief that people's WTP for a good is an accurate proxy for the welfare that they would obtain from that good. For two reasons, the proxy is crude. The first problem is that people may not pay for all of the benefits they receive, and in such cases, use of WTP may lead in unfortunate directions, even or especially if welfare is our lodestar. Inefficient results may nonetheless increase welfare. The second and more fundamental problem is that people may be willing to pay for goods whose acquisition does not improve their welfare. People typically choose on the basis of their affective forecasting, and their affective forecasts can lead them to make bad blunders. Sometimes people overestimate the welfare effects of both losses and gains. These points have many implications for law and policy. In particular, juries are probably offering greatly inflated dollar awards for hedonic damages, and the outcome of cost-benefit analyses, based on WTP, may not capture welfare, suitably defined. The absence of a connection between increases in Gross Domestic Product and self-reported happiness is highly suggestive here.

Number of Pages in PDF File: 35

Keywords: willingness to pay, welfare, cost-benefit analysis, affective forecasting

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Date posted: January 28, 2007  

Suggested Citation

Sunstein, Cass R., Willingness to Pay Versus Welfare. Harvard Journal of Law and Public Policy, Forthcoming; University of Chicago Law & Economics, Olin Working Paper No. 326; University of Chicago, Public Law Working Paper No. 150. Available at SSRN: http://ssrn.com/abstract=959724

Contact Information

Cass R. Sunstein (Contact Author)
Harvard Law School ( email )
1575 Massachusetts Ave
Areeda Hall 225
Cambridge, MA 02138
United States
617-496-2291 (Phone)
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