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Economics/sociology phrase book

Mark Palko points me to this amusing document from Jeffrey Smith and Kermit Daniel, translating sociology jargon into economics and vice-versa. Lots of good jokes there.

Along these lines, I’ve always been bothered by economists’ phrase “willingness to pay” which, in practice, often means “ability to pay.”

And, of course, “earnings” which means “how much money you make.”

But, to be fair, statisticians have some of these too. For example, in psychometrics we use the term “ability” to refer to the very specific ability to get certain questions correct on a test.

13 Comments

  1. Jonathan says:

    Andrew, “willingness to pay” and “ability to pay” are very different. I, and most people in the developed world, I am able to pay $10 for fancy organic milk, but am not willing to. Pushing further, most people in the developed world are able to buy a BMW, but are not willing to as it would mean living in a tiny shared apartment, living on rice and beans, and rarely doing anything else that costs money. It is pretty rare that purchases are actually not in the set of choices someone could make. True, I cannot buy a penthouse suite in Manhattan, even if I lived on rice and beans for the rest of my life, but these kind of options are rarely what we are talking about.

    • Andrew says:

      Jonathan:

      I know that “willingness to pay” and “ability to pay” are very different. My point is that in the econ literature, we often see the term “willingness to pay” being used in settings where I think “ability to pay” is more appropriate.

  2. Allan Sleeman says:

    When economists talk about demand or willingness to pay they implicitly, and usually explicitly, assume that only ability to pay matters. If I literally lack the purchasing power to buy something, a luxury yacht, then I have no demand for it. Therefore willingness to pay assumes ability to pay. This leads to problems when discussing welfare issues because you have no marginal benefit from something that you cannot afford to purchase. But say I am a rabid Seahawks fan and would obtain huge benefits from attending the game but can’t afford a scalped ticket, which is actually bought by a young man working for a hedge fund but who has no interest in the game except for impressing fellow workers that he was at the game. Because economists won’t make interpersonal comparisons they conclude that the market has generated a socially desirable outcome because the ticket was purchased by the person with the highest willingness to pay – they say that if the hedge fund guy is willing to pay $5,000 just to impress his colleagues then who are they to say that his satisfaction should be discounted relative to my Seahawks fan “real” benefit from actually watching the game live and in real time. The “market works” is not a democracy, some people have more votes than others. John Paulson made $5 billion in 2010 and about $13 billion over five years and so his willingness to pay is what is recoded not someone who is not in the market for X as far as economics is concerned because they made only $50,000 in 2010 and $250,000 over five years.

    • Fred says:

      When making a point to others about demand, i.e., talking about public policy or explaining cost-benefit analysis, we paint the devil on the wall, explicitly saying “willingness and ability to pay.” When talking among ourselves, as allan notes, that’s understood.

    • Dale Lehman says:

      I don’t think this is stated correctly. You do have a marginal benefit from things you cannot afford – it is just that it is too low relative to others (as well as to the cost of providing it). So, you don’t end up consuming the item. You did not receive any marginal benefit but that is not the same thing as saying that you had no willingness to pay.

      Now, Andrew’s point about which phrase is more appropriate is a can of worms. Economists have a hard time dealing with distribution of income questions (witness Piketty’s work and the uproar it created). From outside the profession it may appear as though economists are just not willing to question what constraints determine a person’s willingness to pay – they’d rather attribute it to tastes than income. On the other hand, there are plenty of items that people purchase despite having low incomes. Virtually everyone has a cellphone and pays monthly prices that are not cheap – and this includes people with insufficient income to purchase adequate food. Surely, there is more than ability to pay that determines what they spend their money on.

      When I teach introductory economics (which is as rarely as possible), students have a hard time distinguishing between ability and willingness to pay – along the lines that Andrew is suggesting. And, I have mixed feelings about “educating” them about the difference. On the one hand, I am helping them see that there is more to it than just income. On the other hand, perhaps the emperor really has no clothes – income may be 90% of the story and only economists don’t recognize that because it would be to upsetting to most of their policy work. Worse yet, they might start seeming like sociologists!

  3. Lee Sechrest says:

    Health economics is an area in which willingness and ability to pay often get confused with confusing consequences. For example, willingness to pay may be used as an index of the value placed on some health outcome, and people are found to be “willing to pay” far more money to achieve that outcome than they can afford.

  4. Most economic issues in the developing world should be fairly insensitive to the currency in which the prices are denominated, especially those involving little time-preference (where inflation rates would be more important0. If the decisions are independent of the currency units, then the decision must be expressible in terms of a dimensionless ratio of price of the thing of interest to some other price. However, this denominator has been largely ignored in Economic modeling. Most likely, the most explanatory model would be one in which the denominator was something like “total income” or maybe “cost of some basic basket of goods necessary for living a typical quality of life for people that the participant identifies with” or whatever. This encompasses the “keeping up with the Joneses” effect as well as many other effects.

    Given the appropriate choice of denominator, much of the variation in willingness to pay would disappear. We would find that say wealthy Manhattanites are willing to pay 30% of the average income of their peer group for housing, whereas typical rural Mississippi farmers are also willing to pay about 30% of the average income of *their* peer group… or what have you. The relevant dimensionless number would be about 0.3 not a variable number between say $1,000,000/yr for the upper west side playboys and $17,000 for the poor farmers.

    Of course, in some situations, the relevant denominator might be a constant across actors instead of different from actor to actor, like say the cost of a barrel of oil, in which case the current most common practice of using just the outright dollar amounts achieves the same effect. But in my experience, there’s not enough attention paid to this issue in Economics. It’s done implicitly in some cases, but it rarely enters explicitly into the model.

  5. […] I have to say is to remind people of the distinction between willingness-to-pay and ability-to-pay. Economists often say “willingness to pay” when they really mean “ability to pay.” Also The K […]

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