New Compensating and Equivalent Variation Closed-form Solutions for Non-Separable Public Goods

Abstract

This study finds exact closed-form solutions for compensating variation (CV) and equivalent variation (EV) for both marginal and non-marginal changes in public goods given homothetic, but non-separable, utility where a single sufficient statistic summarizes consumer preferences. The closed-form CV and EV expressions identify three economic mechanisms that determine magnitudes. One of these mechanisms, the relative preference effect, helps explain the disparity between willingness to pay (WTP) and willingness to accept (WTA) for public goods. We also show how our closed-form solutions can be employed to calculate WTP and WTA across income groups using estimates from existing empirical studies.