Consumer's Welfare and Change in Stochatstic Partial- Equilibrium Price
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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|Date of creation:||1995|
|Date of revision:|
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- Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-97, September.
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- Helms, L. Jay, 1984. "Comparing stochastic price regimes : The limitations of expected surplus measures," Economics Letters, Elsevier, vol. 14(2-3), pages 173-178.
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- Alison J. Kirby, 1988. "Trade Associations as Information Exchange Mechanisms," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 138-146, Spring.
- 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 423-36, March.
- Carl Shapiro, 1986. "Exchange of Cost Information in Oligopoly," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 433-446.
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