Willingness to pay

Willingness to pay is the maximum amount a buyer would exchange for a good or service. It expresses the buyer’s reservation value, shaped by preferences, resources, and available alternatives.

Reservation price: The highest price a buyer will accept for a good or service, or the lowest price a seller will accept. Willingness to pay is the buyer’s reservation price.
Utility: A representation of how much satisfaction or value a person derives from an outcome or bundle of goods. Willingness to pay reflects how a buyer values the good relative to alternatives.
Contingent valuation: A survey method that estimates the value of a nonmarket good by asking people about hypothetical choices or payments. It directly asks respondents for their willingness to pay for goods without market prices.
Willingness to accept: The minimum compensation a person requires to give up a good, right, or change in circumstances. It measures compensation required, not the maximum a buyer would pay to obtain something.
Consumer sovereignty: The idea that consumers’ preferences, expressed through choices and spending, guide what producers supply. Using willingness to pay to allocate goods gives greater influence to expressed purchasing choices.
Demand curve: A graph showing the quantity of a good demanded at different prices, holding other factors constant. Aggregating buyers’ willingness to pay across quantities traces market demand.
Marginal utility: The additional utility gained from consuming one more unit of a good or service. The value of an extra unit often falls as a buyer consumes more.
Discrete choice experiment: A survey method that estimates preferences by asking people to choose among alternatives with varying attributes and prices. Choices across price levels can estimate how much buyers value specific product features.
Ability to pay: A person’s financial capacity to make a payment, given resources and obligations. Financial capacity can constrain payment without measuring how much the good is valued.
Ability-to-pay principle: A principle that assigns financial burdens according to people’s capacity to pay rather than their direct benefits received. It offers a distributive standard different from valuing benefits by willingness to pay.

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