Measuring Welfare Changes—A Brief Overview
This chapter examines welfare measures when they are made without cardinal utility functions to understand the properties of the aggregate dollar changes in utility computed in a conventional Harberger (1971) analysis. The Hatta (1977) decomposition is used to show how, for individual consumers, dollars are a reliable proxy for utility, whenever policy changes are incrementally small. This decomposition finds that income effects are a scaling coefficient on the efficiency effects from marginal policy changes that play no role in single consumer economies. A number of different approaches are examined to account for distributional effects when there are heterogenous consumers.
Keywords: Broadway paradox, compensating variation, compensation tests, distributional effects, equivalent variation, excess burden of taxation, Hatta decomposition, Pareto efficiency, price-quantity indexes
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