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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. Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2001.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 2 (2001)
Issue (Month): 2 (05)
Pages: 177-193

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Handle: RePEc:bla:germec:v:2:y:2001:i:2:p:177-193

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References

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  1. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  2. repec:ubc:bricol:89-07 is not listed on IDEAS
  3. 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 566-93, September.
  4. James R. Hines, Jr., 1998. "Three Sides of Harberger Triangles," NBER Working Papers 6852, National Bureau of Economic Research, Inc.
  5. Diewert, W E, 1992. "Exact and Superlative Welfare Change Indicators," Economic Inquiry, Western Economic Association International, vol. 30(4), pages 562-82, October.
  6. Jorgenson, Dale W, 1990. "Aggregate Consumer Behavior and the Measurement of Social Welfare," Econometrica, Econometric Society, vol. 58(5), pages 1007-40, September.
  7. Daniel T. Slesnick, 1998. "Empirical Approaches to the Measurement of Welfare," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2108-2165, December.
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Citations

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Cited by:
  1. Hillinger, Claude, 2008. "Measuring Real Value and Inflation," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(20), pages 1-26.
  2. Claude Hillinger, 2002. "A General Theory of Price and Quantity Aggregation and Welfare Measurement," CESifo Working Paper Series 818, CESifo Group Munich.
  3. 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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