Consumer Welfare Measures: Some Comparative Results

Abstract

Consumer's surplus has played an important role in evaluating agricultural price support programs as well as in other applications. Gardner and Wallace provide examples of the use of consumer's surplus in theoretical models, while numerous empirical studies (for example, Anderson, Sedjo and Wiseman, Johnson and Norton) have used the concept to measure welfare costs. Since its introduction by Dupuit and Marshall, the interpretation of consumer's surplus has been subject to change and controversy. In an important paper, Willig demonstrated that consumer's surplus is bounded by compensating variation (C) and equivalent variation (E) and derived rules of thumb showing how closely consumer's surplus approximates these appropriate welfare measures. These rules are compact and readily understandable to researchers doing applied welfare analysis.