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Applied Welfare Economics with Discrete Choice Models

  • Harvey S. Rosen
  • Kenneth A. Small

Economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices. Such models are potentially very important in evaluating the impact of government programs upon consumer welfare. But very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations. This paper shows how the conventional methods of applied welfare economics can be modified to handle such cases. It focuses on the computation of the excess burden of taxation, and the evaluation of quality change. The results are applied to stochastic utility models, including the popular cases of probit and logit analysis. Throughout, the emphasis is on providing rigorous guidelines for carrying out applied work.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0319.

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Date of creation: Feb 1979
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Publication status: published as Small, Kenneth A. and Rosen, Harvey A. "Applied Welfare Economics with Discrete Choice Models." Econometrica, Vol. 49, No. 1, (January 1981), pp. 105- 130.
Handle: RePEc:nbr:nberwo:0319
Note: PE
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