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Compensating Variation, Consumer's Surplus, and Welfare.

This article analyzes the conditions under which the compensating variation can be validly used in this generalized sense. These turn out to be precisely the same as conditions previously derived for the valid use of consumer's surplus as a welfare measure. In the final section of this article, the...

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Published in:American Economic Review Vol. 70; no. 5; pp. 933 - 950
Main Authors: Chipman, John S., Moore, James C.
Format: Article
Published: American Economic Association Dec80
Subjects:
Consumers' surplus
Consumers
Income
Cost effectiveness
Cost analysis
Theory of distributions (Functional analysis)
Consumer preferences
Online Access:View this record in EBSCOhost
Summary:This article analyzes the conditions under which the compensating variation can be validly used in this generalized sense. These turn out to be precisely the same as conditions previously derived for the valid use of consumer's surplus as a welfare measure. In the final section of this article, the authors analyze the problem of deriving the generalized equivalent and compensating variations, either exactly or approximately, from observable demand functions, by means of generalizations of, or alternatives to, consumer's surplus.