Biased Valuations, Damage Assessments, and Policy Choices: The Choice of Measure Matters

Abstract

As commonly pointed out in most instructional and operational manuals, and the benefit–cost and valuation texts on which they are largely based, there is general agreement among economic analysts that the economic values of gains and losses are correctly assessed by two different measures. The value of a gain is appropriately measured by the maximum sum people are willing to pay for it (the so-called WTP measure) – the amount that would leave them indifferent between paying to obtain the improvement and refusing the exchange. The value of a loss is accurately measured by the minimum compensation people demand to accept it (the so-called willingness-to-accept, or WTA, measure) – the sum that would leave them indifferent between being paid to bear the impairment and remaining whole without it.

Citation

Knetsch, J.L. (2007), "Biased Valuations, Damage Assessments, and Policy Choices: The Choice of Measure Matters", Zerbe, R.O. (Ed.) Research in Law and Economics (Research in Law and Economics, Vol. 23), Emerald Group Publishing Limited, Leeds, pp. 345-358. https://doi.org/10.1016/S0193-5895(07)23018-0