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Resolving Differences Essay Sample

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Resolving Differences Essay Sample

The article “Resolving Differences in Willingness to Pay and Willingness to Accept” tests the hypothesis that differences in willingness either to pay (WTP) or to accept (WTA) are due to substitution between the goods. Firstly, the authors describe general experimental design stating that Hanemann’s model is the best appropriate for measuring divergence. Then the article proceeds to outlining main procedures and obtained results. The authors also pay attention to establishing relations between endowment effect and substitution effect. Finally, the authors draw relevant conclusions summing up main points addressed.

It is necessary to outline that the problem addressed by authors is divergence between in measuring WTP and WTA. Actually, it is noted that this divergence troubled and is troubling many economists nowadays. Hanemann provides relevant explanation based on economic theory that divergence is simply “cognitive mistake”. After the experimental procedures the authors have proved that divergence between WTP and WTA is driven by the degree of substitutability between goods. It is stated that for market goods WTA and WTP value measures converge, whereas for non-market goods the value is diverge even with full information about the products. The authors admit that “defining an individual-specific index of substitution for the non-market good could improve the correspondence between economic theory and observed phenomenon”.

It is necessary to agree with many claims posted by authors. For example, Hanemann models to be appropriate for measuring divergence. The authors claim that realizing substitution effect is more significant now and therefore, divergence depends on the degree of substitutability. If the products are substitutable, the vale measures for WTA and WTP converge. Consequently, the less substitutability between goods, the higher the divergence is. Therefore, it is found in the article that for two market goods having close substitute the divergence disappears.

Shogren, J., Shin, S.Y., Hayes D. J., & Kliebenstein J.B. (1994, March). Resolving Differences in Willingness to Pay and Willingness to Accept. The American Economic Review, 256-270.

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