Income Elasticity of Willingness to Pay for Better Air Quality

Abstract

We use a nested CES utility function to introduce a private environmental substitute in a theoretical model. We found that buyer’s income elasticity of WTP increases with price of the substitute and decreases with income. Meanwhile, a higher price and a lower income also discourage purchase of the substitute, reducing the proportion of buyers in population. We therefore need to consider both dimensions while discussing societal mean WTP. An empirical check based on a contingent valuation survey confirms our theoretical findings. The projected income-WTP curves reveal inequality reduces the mean WTP more in the presence of private environmental substitutes.