Integrating WtP/WtA with Equivalent/Compensating
Variation
Discussion - Dr John Bates
The stated preference work commissioned
by the RA was used to calculate the consumer surplus accruing to users of radio
services. Consumer surplus, compensating variation and equivalent variation are
all equal when the income effect is zero. Hence consumer surplus may be calculated
as either compensating variation or equivalent variation. With reliable data about
consumers' income it is possible to test whether the income effect is zero.
The sample data collected in each of the stated preference surveys was used to
estimate the indirect utility function of the representative individual. In calculating
the populations' total consumer surplus from a radio service this aggregation
is an issue because it is assumed that all individuals have the same preferences
and the same level of surplus.
The parameters of the indirect utility function are estimated on the basis that
the individual is rational and maximises utility. It may then be desirable to
incorporate into the stated preference design tests of the consistency of an individual's
responses. Experimental economics may suggest possible research strategies.
