Spurious Deadweight Gains
July 2000 Marshallian consumer surplus (MCS) is generally an inaccurate measure of welfare change because it neglects income effects. Suppose these effects overturn the usual demand response to a price change. Then, the deadweight loss from a distortionary tax or subsidy has the wrong sign, that is, there is a spurious deadweight gain. JEL Classification: D11, D6. Keywords: Marshallian consumer surplus, Giffen goods, Stability of equilibrium
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- Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-676, September.
- Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
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