The Relationship between the Income Elasticities of Demand and Willingness to Pay,

The relationship between income and willingness to pay for collectively provided public/environmental goods is investigated. We show that while the income elasticity of willingness to pay and the ordinary income elasticity of demand are related, knowledge of one is insufficient to determine the magnitude or even the sign of the other. The income elasticity of willingness to pay is influenced by additional factors which are generally unobservable. Examples are provided to illustrate the degree to which the two income elasticities may diverge. Our results indicate that even when goods are demand luxuries they may or may not have income elasticities of willingness to pay which are greater than one.