Estimating the Dispersion of Tastes and Willingnes to Pay

Abstract

The paper examines the concept of willingness to pay and shows how this concept can be explicitly calculated as a function of the unknown parameters of the utility function in a consumer case. The authors postulate a model where the parameters of the utility function vary across the population according to some frequency distribution. They are able to derive the implied demand equations and estimate the unknown parameters of the distribution of tastes using a variation of the standard error components model. The estimated parameters can then be used to calculate the distribution across the population of the willingness to pay for any particular policy change.