Hicksian Surplus Measures of Individual Welfare Change When There is Price and Income Uncertainty
This article considers measures of individual welfare change for projects that change the state distribution of prices and incomes. For a consumer whose preferences satisfy the expected utility hypothesis, we investigate whether there is an increasing function of the state-contingent compensating variations that is positive valued if and only if a project makes the consumer better off ex ante when income and some or all prices are permitted to vary across states. We show that any such measure of individual welfare change must rank projects by their expected compensating variation. Furthermore, the indirect utility function that the consumer uses to evaluate prices and income in each state and that is used to compute expected utilities must be affine in income with the origin term independent of all prices and the weight on income independent of those prices that are uncertain. These restrictions imply that preferences are homothetic. If all prices are uncertain, these conditions are inconsistent with the homogeneity properties of an indirect utility function and, hence, we obtain an impossibility result.
|Date of creation:||Aug 2006|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.vanderbilt.edu/econ/wparchive/index.html|
References listed on IDEAS
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.:
- Choi, E. Kwan & Johnson, Stanley R., 1987.
"Consumer's Surplus and Price Uncertainty,"
Staff General Research Papers Archive
10601, Iowa State University, Department of Economics.
- Frederick V. Waugh, 1944. "Does the Consumer Benefit from Price Instability?," The Quarterly Journal of Economics, Oxford University Press, vol. 58(4), pages 602-614.
- Blackorby, Charles & Donaldson, David, 1986.
"Can Risk-Benefit Analysis Provide Consistent Policy Evaluations of Projects Involving Loss of Life?,"
Royal Economic Society, vol. 96(383), pages 758-73, September.
- BLACKORBY, Charles & DONALDSON, David, . "Can risk-benefit analysis provide consistent policy evaluations of projects involving loss of life?," CORE Discussion Papers RP 714, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Hammond, Peter J., 1980. "Dual interpersonal comparisons of utility and the welfare economics of income distribution : A corrigendum," Journal of Public Economics, Elsevier, vol. 14(1), pages 105-106, August.
- Roberts, Kevin, 1980.
"Price-Independent Welfare Prescriptions,"
Springer, vol. 13(3), pages 277-97, June.
- Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
- Blackorby, C. & Donaldson, D., 1995.
"Market demand Curves and Dupuit-Marshall Consumer's Surpluses: A General Equilibrium Analysis,"
97a24, Universite Aix-Marseille III.
- Blackorby, Charles & Donaldson, David, 1999. "Market demand curves and Dupuit-Marshall consumers' surpluses: a general equilibrium analysis," Mathematical Social Sciences, Elsevier, vol. 37(2), pages 139-163, March.
- Stennek, Johan, 1999. "The expected consumer's surplus as a welfare measure," Journal of Public Economics, Elsevier, vol. 73(2), pages 265-288, August.
- 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.
- Helms, L. Jay, 1984. "Comparing stochastic price regimes : The limitations of expected surplus measures," Economics Letters, Elsevier, vol. 14(2-3), pages 173-178.
- Schmalensee, Richard, 1972. "Option Demand and Consumer's Surplus: Valuing Price Changes under Uncertainty," American Economic Review, American Economic Association, vol. 62(5), pages 813-24, December.
- Anderson, James E & Riley, John G, 1976.
"International Trade with Fluctuating Prices,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(1), pages 76-97, February.
- Helms, L Jay, 1985. "Expected Consumer's Surplus and the Welfare Effects of Price Stabilization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 603-17, October.
- Charles Blackorby & David Donaldson & David Moloney, 1984. "Consumer's Surplus and Welfare Change in a Simple Dynamic Model," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 171-176.
- Chipman, John S & Moore, James C, 1980. "Compensating Variation, Consumer's Surplus, and Welfare," American Economic Review, American Economic Association, vol. 70(5), pages 933-49, December.
- Turnovsky, Stephen J & Shalit, Haim & Schmitz, Andrew, 1980. "Consumer's Surplus, Price Instability, and Consumer Welfare," Econometrica, Econometric Society, vol. 48(1), pages 135-52, January.
- Blackorby, Charles & Boyce, Richard & Russell, R Robert, 1978. "Estimation of Demand Systems Generated by the Gorman Polar Form: A Generalization of the S-Branch Utility Tree," Econometrica, Econometric Society, vol. 46(2), pages 345-63, March.
- Hammond, Peter J., 1977. "Dual interpersonal comparisons of utility and the welfare economics of income distribution," Journal of Public Economics, Elsevier, vol. 7(1), pages 51-71, February.
- Blackorby, Charles & Davidson, Russell & Donaldson, David, 1977. "A Homiletic Exposition of the Expected Utility Hypothesis," Economica, London School of Economics and Political Science, vol. 44(176), pages 351-58, November.
When requesting a correction, please mention this item's handle: RePEc:van:wpaper:0618. 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: (John P. Conley)
If references are entirely missing, you can add them using this form.