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MEASURING CONSUMER WELFARE WITH MEAN DEMANDS *
Author(s) -
Schlee Edward E.
Publication year - 2007
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2007.00448.x
Subject(s) - economics , weighted arithmetic mean , demand curve , econometrics , welfare , preference , economic surplus , standard deviation , statistics , microeconomics , mathematics , market economy
The welfare change from a price increase–for example, the compensating variation (cv)—is often calculated using the expenditure function from an estimated demand. If there is unobserved preference heterogeneity, then the estimated demand is an average over households with different preferences. And the cv from the mean demand does not generally equal the mean cv. We give conditions ensuring that the cv from the mean demand equals the mean cv, is less than the mean cv, and approximates the mean cv better than the change in consumers' surplus. A necessary condition is that demands become more dispersed as income rises.