The Valuation of Benefits

Abstract

The measurement of a project’s benefits has been extensively discussed in the economic literature and concerns the concepts of producer surplus (profits) and consumer surplus. Should only the producer surplus be measured or the consumer surplus also? The concept of consumer surplus was discovered in 1844 by Dupuit, who, in a path-breaking article, tried to measure the public utility of such things as roads, bridges and canals1 He showed that the utility which an individual obtains from the consumption of a certain quantity of a good is greater than the price he pays because the price represents only the utility of the marginal unit and not that of each intra-marginal unit. Thus, according to Dupuit:‘To sum up, political economy has to take as the measure of utility of an object the maximum sacrifice which each consumer would be willing to make in order to acquire the object.’2 What Dupuit has identified is willingness to pay. What is now generally called consumer surplus is the difference between what a consumer is willing to pay and what he actually pays. To give an example: if a person would buy one pound of rice a week if the price were $ 0.20 and two pounds if the price were $ 0.15, then the individual’s consumer surplus when he pays $ 0.15 is $ 0.05, since he would have been willing to pay $ 0.35 for the two pounds, whereas he pays only $ 0.30. The aggregate consumer surplus is the sum of the individual surpluses and is measured by the area under the aggregate demand curve and above the price line.