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Money Metric, Consumer Surplus and Welfare Measurement

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  • Claude Hillinger

Abstract

The paper provides a rigorous derivation of the ‘welfare triangle approximation’ (WTA), which is at the centre of cost–benefit analysis. The result is generalized by showing that the WTA is one of two dual expressions, one of which approximates the change in real consumption, the other the change in the cost of living. The result is based on a correction of a proof attempted by Hicks. Many other derivations are also given, each based on a different definition of the theoretical functions to be approximated. The final result is the following: each of the empirical variations corresponds to a range of theoretical variations. The edges of the range are theoretical Laspeyres and Paasche variations which are approximated linearly; the interior region of the range is approximated quadratically; the centre of the range is replicated exactly by the empirical measures.

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  • Claude Hillinger, 2001. "Money Metric, Consumer Surplus and Welfare Measurement," German Economic Review, Verein für Socialpolitik, vol. 2(2), pages 177-193, May.
    • Handle: RePEc:bla:germec:v:2:y:2001:i:2:p:177-193
    DOI: 10.1111/1468-0475.00033
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    1. Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, vol. 64(4), pages 566-593, September.
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    1. Hillinger, Claude, 2008. "Measuring Real Value and Inflation," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-26.
    2. Richard Batley & Thijs Dekker, 2019. "The Intuition Behind Income Effects of Price Changes in Discrete Choice Models, and a Simple Method for Measuring the Compensating Variation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 337-366, September.
    3. Claude Hillinger, 2002. "A General Theory of Price and Quantity Aggregation and Welfare Measurement," CESifo Working Paper Series 818, CESifo.
    4. Hillinger Claude, 2003. "The Money Metric, Price and Quantity Aggregation and Welfare Measurement," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-36, July.
    5. Hillinger, Claude, 2004. "On the Possibility of Democracy and Rational Collective Choice," Discussion Papers in Economics 429, University of Munich, Department of Economics.

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