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Applied Welfare Economics with Discrete Choice Models

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  • Small, Kenneth A
  • Rosen, Harvey S

Abstract

Economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices. Such models are potentially very important in evaluating the impact of government programs upon consumer welfare. But very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations. This paper shows how the conventional methods of applied welfare economics can be modified to handle such cases. It focuses on the computation of the excess burden of taxation, and the evaluation of quality change. The results are applied to stochastic utility models, including the popular cases of probit and logit analysis. Throughout, the emphasis is on providing rigorous guidelines for carrying out applied work.
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Suggested Citation

  • Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-130, January.
  • Handle: RePEc:ecm:emetrp:v:49:y:1981:i:1:p:105-30
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    References listed on IDEAS

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    1. Jeffrey Rohlfs, 1976. "Evaluation of Changes in a Suboptimal Economy," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 359-362.
    2. Milton Friedman, 1949. "The Marshallian Demand Curve," Journal of Political Economy, University of Chicago Press, vol. 57, pages 463-463.
    3. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
    4. Rader, Trout, 1976. "Equivalence of consumer surplus, the divisia index of output, and Eisenberg's addilog social utility," Journal of Economic Theory, Elsevier, vol. 13(1), pages 58-66, August.
    5. Hause, John C, 1975. "The Theory of Welfare Cost Measurement," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1145-1182, December.
    6. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    7. Silberberg, Eugene, 1972. "Duality and the Many Consumer's Surpluses," American Economic Review, American Economic Association, vol. 62(5), pages 942-952, December.
    8. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters,in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
    9. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February.
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