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Using averting expenditures to estimate the demand for public goods: Combining objective and perceived quality

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  • Lanz, Bruno
  • Provins, Allan
Abstract
In response to the perceived quality of a public good, households may choose to incur averting expenditures as a substitute to its aggregate provision, thereby revealing an (inverse) demand function. When unobserved heterogeneity affects both perceived quality and averting behavior, identification of the demand function is plagued by a problem of endogeneity. In this paper, we propose the use of an auxiliary (first stage) model of perceived quality as a function of objective quality to recover unbiased and microconsistent estimates of marginal willingness to pay for the provision of the public good. The approach can be applied when people have well-formed perceptions of the quality of the good, a prerequisite for the averting expenditures method, and when objective quality of provision is plausibly exogenous. We illustrate the approach with data on averting expenditures for two qualitative aspects of household tap water networks: water hardness and aesthetic quality in terms of taste and odor.

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  • Lanz, Bruno & Provins, Allan, 2017. "Using averting expenditures to estimate the demand for public goods: Combining objective and perceived quality," Resource and Energy Economics, Elsevier, vol. 47(C), pages 20-35.
    • Handle: RePEc:eee:resene:v:47:y:2017:i:c:p:20-35
    DOI: 10.1016/j.reseneeco.2016.09.004
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    Cited by:

    1. Anna-Maria Aksan & William F. Vásquez, 2019. "Quality Perceptions and Water Treatment Behavior at the Household Level," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-33, July.
    2. Armand Totouom & Sostaine Romuald Fouéka Tagne & Jonas Ngouhouo Poufoun, 2018. "Determinants of the avoidance behaviour of householdsto cope with unsafe drinking water: case study of Doualaand Yaoundé in Cameroon," Review of Agricultural, Food and Environmental Studies, INRA Department of Economics, vol. 99(2), pages 121-148.

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    More about this item

    Keywords

    Public good provision; Averting expenditures; Revealed preferences; Perceived quality; Objective quality; Water demand;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • H4 - Public Economics - - Publicly Provided Goods
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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