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A Review Article: The Case against the Use of the Sum of Compensating Variations in Cost-Benefit Analysis

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Author Info
Charles Blackorby
David Donaldson

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Abstract

This paper presents a case against the use of the sum of compensating variations as a cost-benefit test. The authors argue that (1) the ethical judgments implied by the test are not defensible; (2) positive sums of compensating variations occur without potential Pareto improvements, resulting in social preference reversals without simultaneous Scitovsky reversals; (3) when lump-sum transfers are feasible, a positive sum of compensating variations is necessary, but not sufficient, for a potential Pareto improvement; and (4) in order to eliminate preference reversals and intransitivities, all households must have almost identical quasi-homothetic preferences--a condition that is not satisfied in real economies.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 23 (1990)
Issue (Month): 3 (August)
Pages: 471-94
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Handle: RePEc:cje:issued:v:23:y:1990:i:3:p:471-94

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