Accounting for subsistence needs in non-market valuation: a simple proposal

Abstract

Revealed and stated preference techniques are widely used to assess willingness to pay (WTP) for non-market goods as input to public and private decision-making. However, individuals first have to satisfy subsistence needs through market good consumption, which affects their ability to pay. We provide a methodological framework and derive a simple ex post adjustment factor to account for this effect. We quantify its impacts on the WTP for non-market goods and the ranking of projects theoretically, numerically and empirically. This confirms that non-adjusted WTP tends to be plutocratic: the views of the richest – whatever they are – are more likely to impact decision-making, potentially leading to ranking reversal between projects. We also suggest that the subsistence needs-based adjustment factor we propose has a role to play in value transfer procedures. The overall goal is a better representation of the entire population’s preferences with regard to non-market goods.

Keywords:

• subsistence needs
• adjustment factor
• non-market valuation
• value transfer
• population’s preferences

Acknowledgements

We thank participants in the second GREEN-Econ workshop, the eighth SFSE conference, the GAEL and LEMNA seminars, the fifth annual FAERE workshop, the seventh annual WONV workshop, the eighteenth annual LAGV conference, the ${37}^{\mathrm{t}\mathrm{h}}$ Journées de microéconomie appliquée, and Ramses Abul Naga, Dominique Bureau, Katrin Erdlenbruch, Charles Figuières, Emmanuel Flachaire, Bengt Kriström, Justin Leroux, Pierre-Alexandre Mahieu, Michel Lubrano, Stéphane Luchini, Jürgen Meyerhoff, Philippe Quirion, Tina Rambonilaza, Emilie Sartre, Erik Schokkaert, Hubert Stahn and Jean-Christophe Vergnaud for stimulating discussions, Marjorie Sweetko for her thorough rereading of the English. We also thank the three anonymous reviewers for their numerous and valuable comments and suggestions, which helped improve the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed here.

Notes

1 We restrict to small projects unable to markedly change relative prices of goods or real income, to avoid inconsistencies (Brent 2006; Boadway 1974; Blackorby and Donaldson 1990).

2 Indeed, $u_i(x_{i,k})\to \prod _k{x}_{i,k}^{{\alpha }_{i,k}}\mathrm{ }$ when ${\theta }_i\to 0.$

3 The rationale can be found in the discretionary income (see section 2.1) or in models that take into account minimum levels of consumption (known as “Stone-Geary” functions, after Geary 1950; and Stone 1954).

4 Note that WTP_i can also be theoretically obtained with appropriate distribution weights based on a utilitarian SWF (see Appendix A [online supplementary material]).

5 The generalization to more income groups in a discrete or continuous way is straightforward but would make the graphic representation less intuitive. See, for instance, Baumgärtner et al. (2017a) or Meya (2020), who use a log-normally distributed income with a CES function in a continuous framework.

6 To avoid adding complexity, we assume that the non-market goods of the two projects are different. Otherwise, a function accounting for the proportion of the two goods in each project would be required.

7 We use the OECD-modified scale to calculate equivalised disposable income per unit of consumption. This scale assigns a value of 1 to the household head, of 0.5 to each additional adult member and of 0.3 to each child below 14.

Additional information

Funding

This work was supported by the French National Research Agency under Grants ANR-17-EURE-0020, ANR-08-RISKNAT-007-01 (Riskemotion) and ANR-16-CE03-0005 (GREEN-Econ), and by the Excellence Initiative of Aix-Marseille University - A*MIDEX.