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A Graphical Depiction of Hicksian Partial-Equilibrium Welfare Analysis

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Abstract
An inescapable conclusion to be drawn from the literature on the measurement of welfare is that the use of consumer’s surplus is a bad idea. This is especially true in the light of the fact that modern computing power facilitates the straightforward calculation of equivalent variation, the operational welfare indicator that is most strongly justified by economic theory. Consequently, a correct welfare analysis of a price-wealth change of the sort discussed in virtually every cost-benefit text should be principally in terms of Hicksian demand curves, not ordinary (Marshallian) ones. The present paper explains how to construct a graphical depiction of such an analysis, in partial equilibrium, which may be adopted in teaching the principles of cost-benefit analysis to graduate and advanced undergraduate students. This is done by way of several detailed examples covering the scope of applicability of the technique. In addition, a new formula for approximating equivalent variation is developed and analyzed.

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  • Keir G. Armstrong, 2004. "A Graphical Depiction of Hicksian Partial-Equilibrium Welfare Analysis," Carleton Economic Papers 04-09, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:04-09
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    References listed on IDEAS

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    3. Donaldson, David, 1992. "On The Aggregation Of Money Measures Of Well-Being In Applied Welfare Economics," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(1), pages 1-12, July.
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    7. Chipman, John S & Moore, James C, 1980. "Compensating Variation, Consumer's Surplus, and Welfare," American Economic Review, American Economic Association, vol. 70(5), pages 933-949, December.
    8. Charles Blackorby & David Donaldson, 1990. "A Review Article: The Case against the Use of the Sum of Compensating Variations in Cost-Benefit Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 471-494, August.
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    Cited by:

    1. Helge Sanner, 2005. "Price Responses to Market Entry With and Without Endogenous Product Choice," Volkswirtschaftliche Diskussionsbeiträge 81, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.

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