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Spurious Deadweight Gains

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Author Info
Giovanni Facchini
Peter J. Hammond
Hiroyuki Nakata

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Abstract

July 2000

Marshallian consumer surplus (MCS) is generally an inaccurate measure of welfare change because it neglects income effects. Suppose these effects overturn the usual demand response to a price change. Then, the deadweight loss from a distortionary tax or subsidy has the wrong sign, that is, there is a spurious deadweight gain.

JEL Classification: D11, D6. Keywords: Marshallian consumer surplus, Giffen goods, Stability of equilibrium

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 00014.

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Date of creation: Jul 2000
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Handle: RePEc:wop:stanec:00014

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Related research
Keywords: Marshallian consumer surplus; Giffen goods; Stability of equilibrium;

Other versions of this item:

Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D6 - Microeconomics - - Welfare Economics

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  1. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September. [Downloadable!] (restricted)
  2. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-97, September. [Downloadable!] (restricted)
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This page was last updated on 2009-10-31.

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