Household equivalence scales and welfare comparisons

Abstract

The ratio of cost functions of different households facing the same prices and attaining the same utility level is a true cost of (demographic) characteristics index. This index is independent of a base level of income or utility (IB) if and only if it equals a ratio of household equivalence scales that are themselves IB. Applied cost index and equivalence scales specifications are usually IB. This paper describes the general restrictions on cost functions and social welfare functions required for IB scales and for their use in welfare analysis.