The Theory of Welfare Cost Measurement

Abstract

Although welfare change measurements based on consumers' surplus concepts are widely employed in empirical studies, economists have been unable to achieve a satisfactory professional consensus on the theoretical basis, the role of approximations, and the appropriate scope and interpretation of such measurements. This paper attempts to provide a reasonably precise and comprehensive statement of the central ideas, techniques, and formulas that underlie current welfare change measurement. Traditional consumers' surplus techniques are replaced by the expenditures function, since the latter provides a rigorous theoretical resolution to defects of consumers' surplus in analyzing income effects. The paper also attempts to clarify several issues in dealing with simple intertemporal comparisons.