Economics Endowment Effect Questions Medium
The Endowment Effect refers to the tendency of individuals to value an item more highly simply because they own it or possess it. It suggests that people place a higher value on goods they already own compared to the value they would place on the same goods if they did not own them.
The relationship between the Endowment Effect and consumer surplus can be understood by considering the concept of willingness to pay (WTP) and willingness to accept (WTA). Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service (WTP) and the actual price they pay. On the other hand, the Endowment Effect suggests that individuals tend to have a higher WTA for goods they already possess.
When individuals own a good, they tend to develop a sense of attachment and perceive it as more valuable than it actually is. This higher perceived value leads to a higher WTA for the good. As a result, if individuals were to sell the good, they would demand a higher price than what they would be willing to pay if they did not own it. This can lead to a decrease in consumer surplus.
For example, let's consider a scenario where a person owns a rare collectible item. Due to the Endowment Effect, they may value the item at a higher price than its market value. If they were to sell the item, they would demand a price higher than what they would be willing to pay if they did not own it. As a result, the consumer surplus for the buyer would decrease, as they would have to pay a higher price for the item.
In summary, the Endowment Effect can lead to a decrease in consumer surplus as individuals tend to value goods they already possess more highly. This higher valuation can result in a higher willingness to accept (WTA) for the goods, leading to a decrease in consumer surplus when individuals sell the goods.