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The assumption of equal marginal utility of income: how much does it matter?

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  • Medin, Hege
  • Nyborg, Karine
  • Bateman, Ian

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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  • Medin, Hege & Nyborg, Karine & Bateman, Ian, 2001. "The assumption of equal marginal utility of income: how much does it matter?," Ecological Economics, Elsevier, vol. 36(3), pages 397-411, March.
  • Handle: RePEc:eee:ecolec:v:36:y:2001:i:3:p:397-411
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    1. Medin, Hege & Nyborg, Karine & Bateman, Ian, 2001. "The assumption of equal marginal utility of income: how much does it matter?," Ecological Economics, Elsevier, vol. 36(3), pages 397-411, March.
    2. Carson, Richard T, 1999. "Contingent Valuation: A User's Guide," University of California at San Diego, Economics Working Paper Series qt2mw607q7, Department of Economics, UC San Diego.
    3. Bromley, Daniel W., 1990. "The ideology of efficiency: Searching for a theory of policy analysis," Journal of Environmental Economics and Management, Elsevier, vol. 19(1), pages 86-107, July.
    4. I J Bateman & I H Langford, 1997. "Budget-Constraint, Temporal, and Question-Ordering Effects in Contingent Valuation Studies," Environment and Planning A, , vol. 29(7), pages 1215-1228, July.
    5. Nyborg, Karine, 2000. "Project analysis as input to public debate: Environmental valuation versus physical unit indicators," Ecological Economics, Elsevier, vol. 34(3), pages 393-408, September.
    6. Vatn Arild & Bromley Daniel W., 1994. "Choices without Prices without Apologies," Journal of Environmental Economics and Management, Elsevier, vol. 26(2), pages 129-148, March.
    7. Brekke, Kjell Arne, 1997. "The numeraire matters in cost-benefit analysis," Journal of Public Economics, Elsevier, vol. 64(1), pages 117-123, April.
    8. Ian Bateman & Alistair Munro & Bruce Rhodes & Chris Starmer & Robert Sugden, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 479-505.
    9. 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.
    10. Langford, Ian H. & Bateman, Ian J., 1996. "Elicitation and truncation effects in contingent valuation studies," Ecological Economics, Elsevier, vol. 19(3), pages 265-267, December.
    11. Peter J. Hammond, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 263-282.
    12. van Praag, Bernard M. S., 1991. "Ordinal and cardinal utility : An integration of the two dimensions of the welfare concept," Journal of Econometrics, Elsevier, vol. 50(1-2), pages 69-89, October.
    13. Johansson,Per-Olov, 1993. "Cost-Benefit Analysis of Environmental Change," Cambridge Books, Cambridge University Press, number 9780521447928, August.
    14. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309-309.
    15. Unsworth, Robert E. & Bishop, Richard C., 1994. "Assessing natural resource damages using environmental annuities," Ecological Economics, Elsevier, vol. 11(1), pages 35-41, September.
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    Cited by:

    1. Medin, Hege & Nyborg, Karine & Bateman, Ian, 2001. "The assumption of equal marginal utility of income: how much does it matter?," Ecological Economics, Elsevier, vol. 36(3), pages 397-411, March.
    2. Pascal Gastineau & Emmanuelle Taugourdeau, 2013. "Compensating for environmental damages," EconomiX Working Papers 2013-21, University of Paris Nanterre, EconomiX.
    3. Gastineau, Pascal & Taugourdeau, Emmanuelle, 2014. "Compensating for environmental damages," Ecological Economics, Elsevier, vol. 97(C), pages 150-161.
    4. Pascal Gastineau & Emmanuelle Taugourdeau, 2012. "Which compensation for whom?," Documents de travail du Centre d'Economie de la Sorbonne 12080, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    5. repec:hal:journl:halshs-00768884 is not listed on IDEAS
    6. Kant, Shashi, 2003. "Extending the boundaries of forest economics," Forest Policy and Economics, Elsevier, vol. 5(1), pages 39-56, January.
    7. Scarborough, Helen & Bennett, Jeff, 2008. "Estimating intergenerational distribution preferences," Ecological Economics, Elsevier, vol. 66(4), pages 575-583, July.
    8. Schilizzi, Steven, 1999. "Deciding between development and preservation of a natural asset: a way out of the impasse?," 1999 Conference (43th), January 20-22, 1999, Christchurch, New Zealand 124547, Australian Agricultural and Resource Economics Society.
    9. Scarborough, Helen & Bennett, Jeffrey W., 2006. "Estimating intergenerational utility distribution preferences," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139899, Australian Agricultural and Resource Economics Society.
    10. Annegrete Bruvoll & Karine Nyborg, 2004. "The Cold Shiver of Not Giving Enough: On the Social Cost of Recycling Campaigns," Land Economics, University of Wisconsin Press, vol. 80(4).

    More about this item

    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

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