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

Listed author(s):
  • Charles Blackorby
  • David Donaldson

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

Volume (Year): 23 (1990)
Issue (Month): 3 (August)
Pages: 471-494

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Handle: RePEc:cje:issued:v:23:y:1990:i:3:p:471-94
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Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4

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