Background
Revealed preference pricing is a set of economic methods used to assign monetary values to non-marketable goods and services. Unlike marketable goods, these items do not have set prices and typically pertain to environmental and social resources. Revealed preference methods infer the value individuals place on these non-marketable goods through their actual behavior in related markets.
Historical Context
The concept of revealed preference was first introduced by economist Paul Samuelson in the 1930s. It pertains generally to non-market valuations of goods that are not traditionally sold in markets, aiming to deduce their implicit value through the observation of consumer choices and behaviors.
Definitions and Concepts
Revealed preference pricing: A method for assigning monetary values to non-marketable goods and services by examining related market behaviors. Methods include hedonic pricing, wage premia, and travel cost analysis, and can be utilized to value things like environmental quality and public safety.
- Hedonic Pricing: Used to price environmental attributes by analyzing the differential pricing of related market goods, such as property values affected by air quality.
- Wage Premia: Based on the additional wages workers require to undertake risky or otherwise undesirable jobs, reflecting their value of safety and environmental quality.
- Travel Costs: Estimates how much individuals are willing to pay for access to non-marketable goods like national parks, giving a lower bound measurement of their willingness to pay.
Major Analytical Frameworks
Classical Economics
Revealed preference principles align with classical ideas of market behavior. Classical economists would analyze individual active choices and expenditures to deduce value, assuming rational actors.
Neoclassical Economics
Neoclassical economics builds on the revealed preference principle within its framework of utility maximization and market equilibrium, using observed behaviors to help understand willingness to pay.
Keynesian Economics
Though not a primary focus in Keynesian economics, revealed preference pricing complements the Keynesian focus on actual expenditure in determining aggregate demand and the practical value of economic resources.
Marxian Economics
Marxian economists might critique revealed preferences for focusing too much on current market behaviors which often overlook the power disparities and exploitation characterizing capitalist economies.
Institutional Economics
Institutional economists would view revealed preference pricing as entrenched in the broader institutional context, such as legal and social norms which influence how and whether preferences are revealed.
Behavioral Economics
Behavioral economics might scrutinize traditional views of rational decision-making in revealed preferences, suggesting that cognitive biases can distort the demonstration of true preferences for non-marketable goods.
Post-Keynesian Economics
Post-Keynesians would agree on reconciling aggregate demand with microfoundations, using revealed preferences to assess particular influences affecting public and private sector choices.
Austrian Economics
Austrian economists would focus on the subjective nature of value, supportive of revealed preference methods as closely aligned with individual valuation and discovery processes.
Development Economics
Revealed preference is crucial in valuing non-market elements essential for development, like access to clean water or educational opportunities, aiding in effective policy formulation.
Monetarism
Monetarists might focus less on revealed preferences directly, but mathematical models could bake these inferred values into predictions about broader economic volatility and policy impacts.
Comparative Analysis
Revealed preference pricing provides a practical approach to valuation compared to other methods, like stated preferences or cost-benefit analyses. Whereas methods like contingent valuation directly ask individuals their willingness to pay, revealed preference relies on observed behaviors thus may avoid some biases.
Case Studies
- Value of clean air through fluctuations in housing prices across regions with varying pollution levels.
- Economic evaluation of national parks by visitor expenditures on travel and associated costs.
- Compensation analyses for dangerous jobs to infer values placed on human health and safety.
Suggested Books for Further Studies
- “Revealed Preference Theory” by Christopher P. Chambers
- “Hedonic Methods in Housing Markets” by Andrea Baranzini
- “Valuing Environmental and Natural Resources” by Timothy C. Haab
Related Terms with Definitions
- Hedonic Pricing: Method where market goods’ prices are used to infer the value of associated non-market factors.
- Willingness to Pay (WTP): The maximum amount an individual would sacrifice to acquire a good or service.
- Environmental Valuation: Economic methods aimed at assigning monetary values to environmental benefits and resources.
