Willingness to Pay Experiments

Private Goods

In this part of the experiment we are going to set up a series of auctions markets in which there are a number of buyers and a single seller. The information that you need to make bids is contained on two playing cards. Face cards have been removed from the decks so that all remaining cards have a number (an ace = 1). The number on each card represents your willingness to pay (WTP) for the private good. The black card is the first digit and the red card is the second digit of your WTP. For each if you receive a 7 of spades and a 6 of hearts, your WTP is $76.

Your earnings are equal to the difference between your WTP and your bid. For example, if your WTP is $76, you bid $52 and $52 is the highest bid, your earnings are $24. All bids must be in units of $1. Some of the auctions will be hypothetical and some will be real. In the real auctions, the player with the winning bid will receive 10% of their earnings in the form of cash or a personal check. Each round record your earnings on the record sheet.

English Auction

The auctioneer first solicits an opening bid from somebody in the group. Then he asks if anyone has a higher bid. Anyone who wants to bid should call out a new price that is at least higher than the previous high bid. The bidding continues until all bidders but one have dropped out. The highest bidder gets the private good being sold for a price equal to the final bid.

Dutch Auction

The auctioneer starts with a price that he knows is higher than anyone's maximum willingness to pay and lowers the price gradually until some buyer signals. The first buyer to signal gets the object at the price the auctioneer called just before the signal was made.

Sealed-Bid, First-Price Auction

Bidders write their bids for the private good and their names or identification numbers on slips of paper and deliver them to the auctioneer. The auctioneer examines the bids and sells the object to the highest bidder at the price that he or she bid. Ties will be settled by the method commonly used in Japan to settle ties, which is to play a game of "rock-paper-scissors."

Sealed-Bid, First-Price Auction

Bidders write their bids for the private good and their names or identification numbers on slips of paper and deliver them to the auctioneer. The auctioneer examines the bids and sells the object to the highest bidder at the price that he or she bid. Ties will be settled by the method commonly used in Japan to settle ties, which is to play a game of "rock-paper-scissors."

Sealed-Bid, Second-Price Auction

Bidders write their bids for the private good and their names or identification numbers on slips of paper and deliver them to the auctioneer. The auctioneer examines the bids and sells the object to the highest bidder at the price bid by the second-highest bidder. Ties will be settled by the method commonly used in Japan to settle ties, which is to play a game of "rock-paper-scissors."

Public Goods

In this part of the experiment we are going to set up a series of public good allocations in which there are a number of citizen-buyers and a single seller. In the public good allocations there is a total cost for the public good. A roll of the dice will determine the total cost. The first roll determines the first digit and the second roll determines the second digit (e.g., if the first roll is 3 and the second roll is 9 then the individual cost is $39 and the total cost is $39 n, where n is the number of players). The individual benefit of the public good is equal to WTP for the public good which is constructed as in the private good auctions.

Some of the public good allocations will be hypothetical and some will be real. In the real allocations, a randomly drawn player will receive 10% of their earnings in the form of cash or a personal check.

Voluntary Donations

Citizens write their donations for the public good and their names or identification numbers on slips of paper and deliver them to the auctioneer. The auctioneer calculates the total donations. If the total donations are less than the total cost then the public good is not provided. If the total donations are greater than or equal to the total cost then the public good is provided. Earnings are equal to WTP net of the individual donation.

Referendum

The individual cost of the public good is an individual tax that all citizens must pay if the public good is provided. Citizens write down whether they vote "for" or "against" allocation of the public good and their names or identification numbers on slips of paper and deliver them to the auctioneer. The auctioneer tallies the votes. If the percentage of "for" votes is greater than or equal to 50% then the public good is provided. Earnings are equal to WTP net of the individual cost. Note that earnings may be negative.

Voluntary Donations: A Real Public Good

The U.S. Environmental Protection Agency issues pollution allowances or permits that enable companies to emit sulfur dioxide (SO2). These permits are auctioned off to the public and a permit for one ton of sulfur dioxide was recently about $130. The Acid Rain Retirement Fund raises funds and bids alongside polluters for as many pollution allowances as their funds can buy. They then retire that pollution credit permanently. See the EPA's Acid Rain Program website and ARRF's press release for more details.

In this round, you are given the chance to purchase and remove one ton (2000) pounds of air pollution in the annual auction of sulfur dioxide emissions allowances that will be conducted during March 2004 by the Chicago Board of Trade. The the lowest price at which a successful bid is made per ton to remove a ton of pollution is called the clearing price. In 2004 the clearing price was $260. The auctioneer will match the total amount of donations from the class to achieve the $260 cost. If the total amount of donations from the class is received by December 31, 2004 ($130 in cash or a check that clears), the auctioneer will deliver a personal check for $260 to the Acid Rain Retirement Fund during January 2005. ECO 3620 will then receive a "Clean Air Certificate" which will be posted on the ECO 3620 website.