Social Willingness to Pay under Equity Concerns
12:00 - 13:30
The paper analyzes to which extent risk and equity preferences affect society's willingness to pay to eliminate a social risk, which is defined as a global risk that has differentiated impacts across subgroups of the population. Three approaches to equity are considered: utilitarianism; concerns for the distribution of individual risks; concerns for the distribution of realized individual risks (in particular, the expected equally distributed equivalent criterion proposed by Fleurbaey, 2010). For each approach, I first define a social premium, which extends to the case of social risks the classic Arrow-Pratt risk premium for private risks. Then, I decompose the social premium in a risk premium and an inequality premium, and study their properties in the small and in the large, in a way analogous to the classic Arrow-Pratt result. Extensions of the model allow for multiplicative risks and dynamic frameworks. Finally, I present two applications: the social cost derived by the risk of major hurricanes in the US and the mitigation policy to avert climate change risk.