A Graphical Depiction of Hicksian Partial-Equilibrium Welfare Analysis
An inescapable conclusion to be drawn from the literature on the measurement of welfare is that the use of consumer’s surplus is a bad idea. This is especially true in the light of the fact that modern computing power facilitates the straightforward calculation of equivalent variation, the operational welfare indicator that is most strongly justified by economic theory. Consequently, a correct welfare analysis of a price-wealth change of the sort discussed in virtually every cost-benefit text should be principally in terms of Hicksian demand curves, not ordinary (Marshallian) ones. The present paper explains how to construct a graphical depiction of such an analysis, in partial equilibrium, which may be adopted in teaching the principles of cost-benefit analysis to graduate and advanced undergraduate students. This is done by way of several detailed examples covering the scope of applicability of the technique. In addition, a new formula for approximating equivalent variation is developed and analyzed.
|Date of creation:||May 2004|
|Publication status:||Published: Carleton Economic Papers|
|Contact details of provider:|| Postal: C870 Loeb Building, 1125 Colonel By Drive, Ottawa Ontario, K1S 5B6 Canada|
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Donaldson, David, 1992. "On The Aggregation Of Money Measures Of Well-Being In Applied Welfare Economics," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
- J. R. Hicks, 1942. "Consumers' Surplus and Index-Numbers," Review of Economic Studies, Oxford University Press, vol. 9(2), pages 126-137.
- Chipman, John S & Moore, James C, 1980. "Compensating Variation, Consumer's Surplus, and Welfare," American Economic Review, American Economic Association, vol. 70(5), pages 933-949, December.
- Daniel T. Slesnick, 1998. "Empirical Approaches to the Measurement of Welfare," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2108-2165, December.
- Blackorby, Charles & Donaldson, David, 1988. "Money metric utility: A harmless normalization?," Journal of Economic Theory, Elsevier, vol. 46(1), pages 120-129, October.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, April.
When requesting a correction, please mention this item's handle: RePEc:car:carecp:04-09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sabrina Robineau)
If references are entirely missing, you can add them using this form.