Consumer's Surplus as an Exact Approximation When Prices Are Appropriately Deflated

Martin Weitzman

The Quarterly Journal of Economics, 1988, vol. 103, issue 3, 543-553

Abstract: A canonical price-normalized form is proposed as a generalization of the ordinary consumer's surplus expression commonly used to evaluate changes in economic welfare. This familiar-looking formula, it is proved, can be rigorously interpreted as representing the first- and second-order terms of a Taylor-series expansion for the equivalent-variation or willingness-to-pay function of a single consumer. In principle, the lowly consumer's surplus triangle-and-rectangle methodology can be rigorously defended as an exact approximation to a theoretically meaningful measure as long as prices are appropriately deflated. The appropriate price deflator is derived, and some implications are discussed.

Date: 1988
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