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Value of Information and Averting Behavior: The Case of Toxic Water Contamination

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  • Konishi, Yoshifumi
  • Coggins, Jay S.

Abstract

Little theoretical work has been done previously on the welfare valuation of changes in price and quality when consumers are imperfectly informed. The presence of imperfect information is particularly important in the analysis of averting behaviors. We develop a theoretical welfare measure, called quasi-compensating variation, as a natural extension of compensating variation (CV). We show that this welfare measure offers not only a money metric of the "value of information", but also a means to appropriately evaluate the welfare effects of various policies when consumers are imperfectly informed of water contamination. With a numerical example and our decomposition results (Propositions 2 and 3), we demonstrate that (i) the value of information could potentially account for a large portion of the total welfare gains when regulators simultaneously disseminate accurate information and improve drinking water quality, (ii) the willingness to pay to avoid toxic contamination is strictly larger for imperfectly informed than perfectly informed consumers, and (iii) the distribution of imperfect information among consumers affects the relative performance of the two compelling policy alternatives, "self-protection" and "pollution control".

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2006 Annual meeting, July 23-26, Long Beach, CA with number 21395.

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Date of creation: 2006
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Handle: RePEc:ags:aaea06:21395

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Keywords: Consumer/Household Economics;

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  1. Courant, Paul N. & Porter, Richard C., 1981. "Averting expenditure and the cost of pollution," Journal of Environmental Economics and Management, Elsevier, vol. 8(4), pages 321-329, December.
  2. Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994. "Strategic Information Manipulation in Duopolies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 363-384, April.
  3. Bartik, Timothy J., 1988. "Evaluating the benefits of non-marginal reductions in pollution using information on defensive expenditures," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 111-127, March.
  4. Seung-Jun Kwak & Clifford Russell, 1994. "Contingent valuation in Korean environmental planning: A pilot application to the protection of drinking water quality in Seoul," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 4(5), pages 511-526, October.
  5. Polasky, Stephen, 1992. "The private and social value of information: Exploration for exhaustible resources," Journal of Environmental Economics and Management, Elsevier, vol. 23(1), pages 1-21, July.
  6. Dickie, M. & Gerking, S., 1993. "Formation of Risk Beleifs, Joint Production and Willingness to Pay to Avoid Skin Cancer," Papers 398e, Georgia - College of Business Administration, Department of Economics.
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