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The Theory and Estimation of Individual and Social Welfare Measures

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  • Becht, Marco

Abstract

The most widespread measure of individual welfare is consumer surplus (cs). If consumer surplus is to represent underlying preferences, very restrictive assumptions must be imposed and, worse, the resulting measures completely ignore distributional issues. Applied economists often argue that consumer surplus is a good approximation to the theoretically correct measures and the only feasible choice in practice. This is no longer true; recent advances in estimation techniques have made it possible to determine the approximate values of the correct measures quite satisfactorily. The theory and estimation of social welfare measures automatically involves ethical and distributional judgements. Often, these are difficult to incorporate in intuitive summary indicators that are easy to estimate. A range of money metric measures is presented that provide a more desirable, albeit still problematic alternative. Subject to severe data limitations, the theoretically correct welfare measures can be estimated for a wide range of modelling situations using parametric and nonparametric techniques.
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Suggested Citation

  • Becht, Marco, 1995. " The Theory and Estimation of Individual and Social Welfare Measures," Journal of Economic Surveys, Wiley Blackwell, vol. 9(1), pages 53-87, March.
  • Handle: RePEc:bla:jecsur:v:9:y:1995:i:1:p:53-87
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