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Concept
Willingness to accept
Summary
In economics, willingness to accept (WTA) is the minimum monetary amount that а person is willing to accept to sell a good or service, or to bear a negative externality, such as pollution. This is in contrast to willingness to pay (WTP), which is the maximum amount of money a consumer (a buyer) is willing to sacrifice to purchase a good/service or avoid something undesirable. The price of any transaction will thus be any point between a buyer's willingness to pay and a seller's willingness to accept; the net difference is the economic surplus.
Several methods exist to measure consumer willingness to accept payment. These methods can be differentiated by whether they measure consumers' hypothetical or actual willingness to accept, and whether they measure it directly or indirectly.
Choice modelling techniques may be used to estimate the value of WTA through a choice experiment. Contingent Value techniques are also common and directly ask respondents what they would be willing to accept for different hypothetical scenarios.
Let u(w, x) be an individual's utility function, where w is the person's wealth and x is a dummy variable that takes the value 1 in the presence of an undesired feature and takes the value 0 in the absence of that feature. The utility function is assumed to be increasing in wealth and decreasing in x. Also, define w0 as the person's initial wealth. Then the willingness to accept is defined by
That is, the willingness to accept payment in order to put up with the adverse change equates the pre-change utility (on the right side) with the post-change utility, including compensation.
In contrast, the willingness to pay is defined by
That is, the willingness to pay to avoid the adverse change equates the post-change utility, diminished by the presence of the adverse change (on the right side), with utility without the adverse change but with payment having been made to avoid it.
The concept extends readily to a context of uncertain outcomes, in which case the utility function above is replaced by the expected value of a von Neumann-Morgenstern utility function (See expected utility hypothesis).
Official source
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