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Hicksian Surplus Measures of Individual Welfare Change When There is Price and Income Uncertainty

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  • Charles Blackorby

    ()
    (Department of Economics, University of Warwick and GREQAM)

  • David Donaldson

    ()
    (Department of Economics, University of British Columbia)

  • John A. Weymark

    ()
    (Department of Economics, Vanderbilt University)

Abstract

This article considers measures of individual welfare change for projects that change the state distribution of prices and incomes. For a consumer whose preferences satisfy the expected utility hypothesis, we investigate whether there is an increasing function of the state-contingent compensating variations that is positive valued if and only if a project makes the consumer better off ex ante when income and some or all prices are permitted to vary across states. We show that any such measure of individual welfare change must rank projects by their expected compensating variation. Furthermore, the indirect utility function that the consumer uses to evaluate prices and income in each state and that is used to compute expected utilities must be affine in income with the origin term independent of all prices and the weight on income independent of those prices that are uncertain. These restrictions imply that preferences are homothetic. If all prices are uncertain, these conditions are inconsistent with the homogeneity properties of an indirect utility function and, hence, we obtain an impossibility result.

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File URL: http://www.accessecon.com/pubs/VUECON/vu06-w18.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0618.

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Date of creation: Aug 2006
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Handle: RePEc:van:wpaper:0618

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Cost-benefit; consumer's surplus; expected compensating variation;

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  1. Blackorby, C. & Donaldson, D., 1995. "Market demand Curves and Dupuit-Marshall Consumer's Surpluses: A General Equilibrium Analysis," G.R.E.Q.A.M. 97a24, Universite Aix-Marseille III.
  2. Blackorby, Charles & Donaldson, David & Moloney, David, 1984. "Consumer's Surplus and Welfare Change in a Simple Dynamic Model," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 171-76, January.
  3. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  4. Roberts, Kevin, 1980. "Price-independent welfare prescriptions," Journal of Public Economics, Elsevier, vol. 13(3), pages 277-297, June.
  5. Choi, Eun Kwan & Johnson, Stanley R, 1987. "Consumer's Surplus and Price Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 407-11, June.
  6. BLACKORBY, Charles & DONALDSON, David, . "Can risk-benefit analysis provide consistent policy evaluations of projects involving loss of life?," CORE Discussion Papers RP -714, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. James E. Anderson & John G. Riley, 1973. "International Trade With Fluctuating Prices," UCLA Economics Working Papers 040, UCLA Department of Economics.
  8. Helms, L. Jay, 1984. "Comparing stochastic price regimes : The limitations of expected surplus measures," Economics Letters, Elsevier, vol. 14(2-3), pages 173-178.
  9. Hammond, Peter J., 1977. "Dual interpersonal comparisons of utility and the welfare economics of income distribution," Journal of Public Economics, Elsevier, vol. 7(1), pages 51-71, February.
  10. Hammond, Peter J., 1980. "Dual interpersonal comparisons of utility and the welfare economics of income distribution : A corrigendum," Journal of Public Economics, Elsevier, vol. 14(1), pages 105-106, August.
  11. Blackorby, Charles & Davidson, Russell & Donaldson, David, 1977. "A Homiletic Exposition of the Expected Utility Hypothesis," Economica, London School of Economics and Political Science, vol. 44(176), pages 351-58, November.
  12. Helms, L Jay, 1985. "Expected Consumer's Surplus and the Welfare Effects of Price Stabilization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 603-17, October.
  13. Blackorby, Charles & Boyce, Richard & Russell, R Robert, 1978. "Estimation of Demand Systems Generated by the Gorman Polar Form: A Generalization of the S-Branch Utility Tree," Econometrica, Econometric Society, vol. 46(2), pages 345-63, March.
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