Consumer's Surplus as an Exact Approximation When Prices Are Appropriately Deflated
A canonical price-normalized form is proposed as a generalization of the ordinary consumer's surplus expression commonly used to evaluate changes in economic wel fare. This familiar-looking formula, it is proved, can be rigorously interpreted as representing the first- and second-order terms of a Ta ylor-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 defende d as an exact approximation to a theoretically meaningful measure as long as prices are appropriately deflated. The appropriate price defl ator is derived, and some implications are discussed. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 103 (1988)
Issue (Month): 3 (August)
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