Welfare from a benefit viewpoint (*)

David G. Luenberger
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David G. Luenberger: Department of Engineering-Economic Systems, Stanford University, Standford, CA 94305-4025, USA

Economic Theory, 1996, vol. 7, issue 3, 445-462

Abstract: Individual welfare is most naturally measured in terms of individual utility but this has the well-known disadvantage that utility levels of different consumers cannot be meaningfully compared. This difficulty is traditionally avoided by using various willingness-to-pay measures, such as compensating and equivalent variation. These measures are based on price changes. This paper develops alternative welfare measures using willingness-to-trade concepts as originally proposed by Dupuit (1844). These measures are based directly on commodity bundle changes. These welfare measures can be represented as integrals under certain inverse demand functions. An important property of the proposed welfare measures studied here is that they can be meaningfully aggregated to form overall welfare measures. These measures in turn directly quantify a compensation criterion. It is shown that competitive prices provide a first-order approximation to the welfare measures. Furthermore a second-order approximation can be found by forming a suitable aggregation of the individual second-order effects. Finally, it is shown that the representations for consumer welfare as integrals under inverse demand curves can be extended to the aggregate measures as well. This then provides a complete complement to traditional measures based on price changes.

JEL-codes: D00 D60 (search for similar items in EconPapers)
Date: 1996
Note: Received: June 3, 1993; revised version March 3, 1995
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