Issues with Using Willingness-to-Pay as a Primary Tool for Welfare Analysis

I agree that this is an important topic. Economic welfare analysis is a widely used method for cause prioritization, and a lot of it looks very different from the kind of cause prioritization work that 80k or Open Philanthropy would do. So it's useful to look into why that is.

That said, a lot of the economics literature goes beyond the simple "maximize surplus" approach that you highlight. The main subfield to look at is public economics (or a narrower subfield called public finance). That's where you find professors who understand welfare economics the most. Since at least the 1970s, mainstream public economists have studied optimal policy using social welfare functions which capture the idea of diminishing marginal utility from wealth (James Mirlees' Nobel prize-winning work on optimal redistribution is a good example. Atkinson and Stiglitz's textbook, first published in 1980, is a great resource for learning this kind of stuff. And here are a few examples of papers published in the last few years). Roughly, those papers adjust WTP by a factor to account for differing marginal utilities, as you suggest in your google doc.

Many economists who most directly influence public policy are public economics or public finance professors (as an example, all 5 professors from the University of Chicago who served on the Council of Economic Advisors in the past 12 years were from public economics), so narrow "maximize willingness to pay" thinking shouldn't be a problem for them.

However, many economists outside of public economics often do engage in the simple "maximize WTP" thinking that you're talking about. Unfortunately, more sophisticated welfare analysis often isn't a standard part of graduate school curricula (let alone undergrad courses), so a lot of economists don't know about it. These economists could be having negative impacts in a number of ways:

1. They directly influence policy. The main channel for this, I would expect, is macroeconomics policy. It may also impact development policy, but from what I've heard development economists rarely do any sort of formal welfare analysis (they don't even consider consumer surplus), and instead just look at ad-hoc objectives like increasing health or output.
2. They teach welfare analysis poorly to students. This leads to more economists who don't know any welfare analysis beyond willingness to pay.

I'm not sure how big this negative impact is, but if it turned out to be big, I think the solution would be on the education side. Basic concepts in welfare economics, including optimal redistribution, should be a part of standard graduate and undergraduate economics curricula. Interested students should be informed that if they want to learn more they should take a public finance elective. From what I hear, this is fairly common at European universities, but not at American ones.

I agree that this is a problem and had previously raised the question in a post on the Forum, (though it is my lowest scoring post ever so evidently lots of people disagree with my argument!) 

This issue became especially clear in early attempts by economists to put a value on the life of people across countries. Since people in poor countries took on greater risk for less money, their lives were valued at a fraction of those in rich countries. 

Another example is tickets. Suppose that we are selling tickets to the final of Euro 2020 and that Warren Buffet buys all the tickets for the game because he likes to watch games in empty stadia. Economists often say that because willingness to pay tracks utility across persons and the tickets went to the highest bigger, this outcome enhances social welfare compared to a world in which the ticket prices were kept artificially low. But obviously the fact that Buffet is willing to pay so much for the tickets is more a reflection of his massive wealth and peculiar tastes and not the fact that his welfare would actually be enhanced more than everyone else. 

Economists then try to solve this by having independent fairness or equity constraints. But the market outcome is bad on utilitarian grounds. 

For governments who have the option to tax, WTP has obvious relevance as a way of comparing a policy to a benchmark of taxation+redistribution. I tentatively think that an idealized state (representing any kind of combination of its constituents' interests) ought to use a WTP analysis for almost all of its policy decisions. I wrote some opinionated thoughts here.

It's less clear if this is relevant for a realistic, state and the discussion becomes more complex. I think it depends on a question like "what is the role of cost-effectiveness analysis in contexts where it is a relatively minor input  into decision-making?" I think realistically there will be different kinds of cost-benefit analyses for different purposes.  Sometimes WTP will be appropriate but probably not most of the time. When those other analyses depend on welfare, I expect they can often be productively framed as "WTP x (utility/$)" with some reasonable estimate for utility/$. But even that abstraction will often break down in cases where WTP is hard-to-observe or beneficiaries are irrational or whatever.

I think for a philanthropist WTP isn't compelling as a metric, and should usually be combined with an explicit estimate of (utility/$). I don't think I've seen philanthropists using WTP in this way and certainly wouldn't expect to see someone suggesting that handing money to rich people is more effective since it can be done with lower overhead.

I would like someone with a background in both economics and EA to offer an articulation of the best defense of using willingness-to-pay in cost-benefit analysis. My experience is that when people raise this objection, many economists (e.g. Robin Hanson) respond by saying that the critics haven't really understood the methods of economics. But I have never seen a clear explanation of why the objection is mistaken.

I think it is also worth noting that the economists themselves do not appear to apply willingness-to-pay consistently. John Broome (an economist by training) explains (Climate Matters, pp. 144–145):

If people are richer in the future, that means additional commodities bring less benefit on average to future people than the same commodities bring to present people. A kilo of rice in one hundred years will contribute less on average to the well-being of the people who eat it than a kilo contributes today. This is a good reason for discounting future commodities. Ironically, although cost-benefit analysts generally ignore the diminishing marginal benefit of money when they are aggregating value across people at a single date, their main case for discounting future commodities is founded on this diminishing marginal benefit. 

Ideally we'd move onto measures of subjective well-being, like life satisfaction and just use them directly, but I expect data to be much harder to obtain (at least I'd guess there's much less data now, and I expect trying to estimate the effects of various goods on life satisfaction would require large samples of subjects or experiments to detect effects). Your solution 1, using weights based on subjective well-being like you describe, seems like a good approach.

It is a problem and there are already solutions for that in the field (Public Economics/Environment Economics). This is called the Distributional aspects of CBA, if you want you can take a look at the course Cost-Benefit Analysis from the University of Helsinki which provides related material. The link to the course: https://studies.helsinki.fi/courses/cur/otm-e45f15a4-2322-4e44-93ba-e3bbb2e95d63

The 2 research papers that they used in the course, you can take a look here:

https://www.econstor.eu/bitstream/10419/102065/1/781242428.pdf

https://www.sciencedirect.com/science/article/pii/S0921800917318074

Hope that helps!