Willingness To Pay vs. Welfare

by CASS R. SUNSTEIN

Consider the following cases:
1. Jones, who is wealthy, is willing to pay $1,000 and no more for a new television set. Jones would enjoy a new television set, but he already has a good television set, and he would not, in fact, gain a great deal from a new one. But because he is so wealthy, he would be better off with the television set than with $1,000.

2. Smith, who is poor, is willing to pay $75 and no more for a new television set. Smith would greatly enjoy a new television set; he does not now have one. He would be better off with the television set than with $75. But because he is poor, he would be worse off with the television set at a price in excess of $75.

3. Jenkins, who is poor and disabled, is willing to pay $20 and no more for a workplace accommodation that will enable her to work. The cost of the accommodation to her employer is $150. If the accommodation is made, Jenkins will gain far more in terms of welfare than the employer (and its customers) will lose.

4. Wilson, who is a very wealthy New Yorker, would be willing to pay $1,000,000 for a summer home in Aspen, Colorado. It turns out that if Wilson bought that summer home, she would not much enjoy it, and in the long run she would not use it. She would miss her friends and her life in New York. In the end, she would be better off with $1,000,000 than with the summer home in Aspen.

5. Andrews, who is poor, is not willing to pay $600 for a health insurance plan. It turns out that if Andrews bought that health insurance plan, her life would be much better; she would be far healthier and her chronic back problem would be greatly improved. For her, the loss of $600 would be much smaller than the gain, in terms of welfare, from purchase of the health insurance plan.

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