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Consumer's Surplus as an Exact Approximation When Prices Are Appropriately Deflated

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  • Martin L. Weitzman

Abstract

A canonical price-normalized form is proposed as a generalization of the ordinary consumer's surplus expression commonly used to evaluate changes in economic welfare. This familiar-looking formula, it is proved, can be rigorously interpreted as representing the first- and second-order terms of a Taylor-series expansion for the equivalent-variation or willingness-to-pay function of a single consumer. In principle, the lowly consumer's surplus triangle-and-rectangle methodology can be rigorously defended as an exact approximation to a theoretically meaningful measure as long as prices are appropriately deflated. The appropriate price deflator is derived, and some implications are discussed.

Suggested Citation

  • Martin L. Weitzman, 1988. "Consumer's Surplus as an Exact Approximation When Prices Are Appropriately Deflated," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 543-553.
  • Handle: RePEc:oup:qjecon:v:103:y:1988:i:3:p:543-553.
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    File URL: http://hdl.handle.net/10.2307/1885544
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    Cited by:

    1. Barnett, William A. & Erwin Diewert, W. & Zellner, Arnold, 2011. "Introduction to measurement with theory," Journal of Econometrics, Elsevier, vol. 161(1), pages 1-5, March.
    2. M. Fleurbaey., 2012. "Beyond GDP: The Quest for a Measure of Social Welfare," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 3.
    3. Saphores, Jean-Daniel M. & Boarnet, Marlon G., 2006. "Uncertainty and the timing of an urban congestion relief investment.: The no-land case," Journal of Urban Economics, Elsevier, vol. 59(2), pages 189-208, March.

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