Oren Bar-Gill, an economics and law professor at Harvard, recently wrote a paper critiquing the use of willingness-to-pay (WTP) as a proxy for utility because WTP is affected by wealth (some economists refer to WTP as “willingness-and-ability-to-pay” for this reason). Specifically, all else equal, wealthy people have a higher WTP for most (perhaps not all?) goods. This means that standard, microeconomic welfare estimates using WTP -- i.e. consumer surplus maximization -- implicitly add greater weight to the utility of wealthy individuals relative to poor individuals.
We’re wondering if you all (a.) think this is a problem and (b.) have come across/can think of solutions for dealing with this concern.
Extra info: We think this issue may have real-world consequences. Economists regularly use consumer surplus to make policy decisions. For example, the FTC uses consumer surplus as a chief consideration when making decisions about antitrust regulation. Additionally, well-respected economists regularly use consumer surplus maximization as an approximation of welfare for policy papers such as in this paper about price ceilings in natural gas markets.
Given that this concern seems to have real-world consequences, we find it strange that professors at our university (which has a well-regarded economics department) didn't address it. Most undergraduate microeconomic courses used surplus maximization as the core tool for welfare maximization. Yet, in our experience, no professor brought up the fact that using WTP may add greater weight to the utility of wealthy people. This made us think we were missing something, but professors seemed to agree that this was a concern when we asked in office hours.
If you also think this is a problem, we’re very interested in hearing how you think it can be (at least partially) resolved. Here are a few examples of “solutions” (more like band-aids) we thought about:
- Split up groups by income and separately analyze the WTP (and the derived consumer surplus) of each group. Then apply different weightings to each group’s consumer surplus and finally summing. We took a stab at this in this spreadsheet and explain our process in this doc.
- Control for poverty when conducting a regression analysis using survey data. Feel free to link examples.
We'd love comments on these proposed solutions or other suggestions. Thanks!!
Thank you for this informative answer!
I vaguely recall hearing an economist say that welfare economics ceased to be part of the undergraduate curricula in American universities at some point in the past. I wonder if it might be worth tracing down the history of this development and examine it as a potentially instructive case study. Quick googling uncovers an interview with Amartya Sen in which the Indian economist recommends Tony Atkinson's The strange disappearance of welfare economics as the "best article on that sad neglect".