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Consumer's Welfare and Change in Stochastic Partial-Equilibrium Price

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  • Stennek, J.

Abstract

First, I show that the expected consumer's surplus is equivalent to ex ante compensating variation if and only if the consumer is risk neutral, and the consumer's income elasticity of demand for the commodity is zero. Moreover, the conditions are equivalent to the von Neuman - Morgenstern utility function being quasi-linear. Second, I show that the expected consumer's surplus is an approximation for the consumer's welfare, measured by expected utility, also if the expenditure share is small. Third, I propose a formula to evaluate approximately the consumer's welfare, measured both by expected utility and by ex ante compensating variation, when the above conditions are not met.
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Suggested Citation

  • Stennek, J., 1995. "Consumer's Welfare and Change in Stochastic Partial-Equilibrium Price," Papers 598, Stockholm - International Economic Studies.
    • Handle: RePEc:fth:stocin:598
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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Rogerson, William P, 1980. "Aggregate Expected Consumer Surplus as a Welfare Index with an Application to Price Stabilization," Econometrica, Econometric Society, vol. 48(2), pages 423-436, March.
    3. Schmalensee, Richard, 1972. "Option Demand and Consumer's Surplus: Valuing Price Changes under Uncertainty," American Economic Review, American Economic Association, vol. 62(5), pages 813-824, December.
    4. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
    5. Alison J. Kirby, 1988. "Trade Associations as Information Exchange Mechanisms," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 138-146, Spring.
    6. Turnovsky, Stephen J & Shalit, Haim & Schmitz, Andrew, 1980. "Consumer's Surplus, Price Instability, and Consumer Welfare," Econometrica, Econometric Society, vol. 48(1), pages 135-152, January.
    7. Helms, L. Jay, 1984. "Comparing stochastic price regimes : The limitations of expected surplus measures," Economics Letters, Elsevier, vol. 14(2-3), pages 173-178.
    8. Carl Shapiro, 1986. "Exchange of Cost Information in Oligopoly," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(3), pages 433-446.
    9. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-387, June.
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    More about this item

    Keywords

    RISK; CONSUMPTION; HOUSEHOLD; ELASTICITY;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D1 - Microeconomics - - Household Behavior
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D69 - Microeconomics - - Welfare Economics - - - Other

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