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Money Metric, Consumer Surplus and Welfare Measurement

  • Claude Hillinger

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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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 listed on IDEAS
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  1. James R. Hines, 1999. "Three Sides of Harberger Triangles," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 167-188, Spring.
  2. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  3. Diewert, W E, 1992. "Exact and Superlative Welfare Change Indicators," Economic Inquiry, Western Economic Association International, vol. 30(4), pages 562-82, October.
  4. Jorgenson, Dale W, 1990. "Aggregate Consumer Behavior and the Measurement of Social Welfare," Econometrica, Econometric Society, vol. 58(5), pages 1007-40, September.
  5. 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.
  6. repec:ubc:bricol:89-07 is not listed on IDEAS
  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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