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The Assumption of Equal Marginal Utility of Income: How Much Does it Matter?

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Author Info
Hege Medin, Karine Nyborg and Ian Bateman (Statistics Norway)

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Abstract

In most applied cost-benefit analyses, individual willingness to pay is aggregated without using explicit welfare weights. This can be justified by postulating a utilitarian social welfare function, along with the assumption of equal marginal utility of income for all individuals. However, since marginal utility is a cardinal concept, there is no generally accepted way to verify the plausibility of this latter assumption, nor its empirical importance. In this paper we use data from seven contingent valuation studies to illustrate that if one instead assumes equal marginal utility of the public good for all individuals, aggregate monetary benefit estimates change dramatically.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 241.

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Date of creation: Nov 1998
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Handle: RePEc:ssb:dispap:241

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Related research
Keywords: Utility comparisons; environmental valuation; cost-benefit analysis; choice of numeraire;

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Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D62 - Microeconomics - - Welfare Economics - - - Externalities
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

References listed on IDEAS
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  1. I J Bateman & I H Langford, 1997. "Budget-constraint, temporal, and question-ordering effects in contingent valuation studies," Environment and Planning A, Pion Ltd, London, vol. 29(7), pages 1215-1228, July. [Downloadable!] (restricted)
  2. Brekke, Kjell Arne, 1997. "The numeraire matters in cost-benefit analysis," Journal of Public Economics, Elsevier, vol. 64(1), pages 117-123, April. [Downloadable!] (restricted)
  3. Hammond, Peter J, 1990. "Theoretical Progress in Public Economics: A Provocative Assessment," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 6-33, January. [Downloadable!] (restricted)
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  4. Bateman, Ian J. & Langford, Ian H. & Turner, R. Kerry & Willis, Ken G. & Garrod, Guy D., 1995. "Elicitation and truncation effects in contingent valuation studies," Ecological Economics, Elsevier, vol. 12(2), pages 161-179, February. [Downloadable!] (restricted)
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  5. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Helen Scarborough & Jeff Bennett & Rodney Carr, 2004. "Using Choice Modeling to Investigate Equity Preferences," Economics Series 2004_03, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance. [Downloadable!]
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