Designer's Corner - Willingness-To-Pay (WTP): The New-Old Kid on the Economic Evaluation Block

Abstract

Cost-benefit analysis (CBA) is defined in the methodology literature as a form of economic evaluation whereby both costs and consequences are measured in monetary terms (Drummond, O'Brien, Stoddart, & Torrance, 1997). In recent years we have witnessed renewed enthusiasm for CBA and contingent valuation (CV) methodology, in particular the willingness-to-pay (WTP) approach to measuring the consequences of health-care programs (Diener, O'Brien, & Gafni, 1998; Klose, 1999). This renewed enthusiasm stems partly from the congruence between the empiric method used to measure the outcome (i.e., WTP) and the theoretical foundation of CBA in welfare theory (Mishan, 1971). This type of analysis also enables direct comparison of benefits and costs, as the two are measured in the same units. An added attraction of CBA is that the same principle of net benefit (i.e., benefit minus cost) can be applied to other sectors such as transport or environment, permitting intersectoral comparisons of resource use. The maximum amount that an individual is willing to pay for goods or services is a common economics measure of the value of those goods or services to the individual. Yet only in recent years have we witnessed renewed enthusiasm for the use of WTP survey techniques in estimating monetary values for improved morbidity and mortality risks. As was observed as far back as a decade ago (Johannesson & Jonsson, 1991), environmental economics and health economics developed differently with respect to evaluation methods. While CBA (and WTP) has evolved into the most common method for valuing environmental