Marshallian Consumer Research Articles

A study of consumer benefit from district heating service in Korea

Integrated energy supply (IES) produces both heat and electricity simultaneously, improving energy efficiency and reducing air pollutants. As of the end of 2016 in Korea, 16.1% of households received district heating service as the government pushed to expand the integrated energy supply. Since large-scale facilities are installed according to local demand for heat, IES—compared to individual heating systems—can increase the consumer benefit by reducing the annual cost of heating through lower facility costs. This study estimates the consumer benefits of district heating service from IES. We apply the compensated variation (CV) based on the Hicksian welfare concept and evaluate new consumers as well as existing consumers who switch from individual heating to district heating. The estimated CV shows that the new consumer benefit is 1.75 times higher in terms of heating cost if they use district heating from IES; moreover, they benefit 50% more than the Marshallian consumer surplus. Consumers who switch to district heating gain a 24% benefit (economic value/heat price equals 1.24). Electricity produced from IES is an indispensable energy source for industrial production, household appliances, cooking, and lighting and the estimated CV shows that a consumer who uses one unit of electricity enjoys 1.38 times additional benefit.

Empirical welfare analysis for discrete choice: Some general results

This paper develops nonparametric methods for welfare‐analysis of economic changes in the common setting of multinomial choice. The results cover (a) simultaneous price‐change of multiple alternatives, (b) introduction/elimination of an option, (c) changes in choice‐characteristics, and (d) choice among nonexclusive alternatives. In these cases, Marshallian consumer surplus becomes path‐dependent, but Hicksian welfare remains well‐defined. We demonstrate that under completely unrestricted preference‐heterogeneity and income‐effects, the distributions of Hicksian welfare are point‐identified from structural choice‐probabilities in scenarios (a), (b), and only set‐identified in (c), (d). In program‐evaluation contexts, our results enable the calculation of compensated‐effects, that is, the program's cash‐equivalent and resulting deadweight‐loss. They also facilitate a theoretically justified cost‐benefit comparison of interventions targeting different outcomes, for example, a tuition‐subsidy and a health‐product subsidy. Welfare analyses under endogeneity is briefly discussed. An application to data on choice of fishing‐mode illustrates the methods. Multinomial choice general heterogeneity income effects compensating variation deadweight loss multiple price change elimination of alternative change in characteristics weak separability nonexclusive choice compensated program‐effects C14 C25 D12 D61 H22

Indirect Welfare Effects of Price Changes and Cost-Benefit Analysis

The effects of a policy measure often reach the consumer only after one or more intermediate steps, for instance because the measure lowers the cost of an input for an industry producing a consumer good. This paper is concerned with the question how to measure such indirect effects correctly under conditions of perfect and imperfect competition. Conventional CBA measures the indirect effects on consumers as the direct effect on other actors (e.g. the Marshallian consumer's surplus of the demand for the input whose price changes). Formal analysis establishes the correctness of this approach under perfect competition, provided that the demand curve is appropriately defined. Under less than perfect competition, the indirect effect can differ from the direct effect. Under monopoly the indirect effect is always larger than the direct effect. Under monopolistic competition it can be smaller, identical or larger, depending on the details of the model specification and on the possibility of entry.

Nonparametric Welfare Analysis for Discrete Choice

We consider empirical measurement of equivalent variation (EV) and compensating variation (CV) resulting from price change of a discrete good using individual-level data when there is unobserved heterogeneity in preferences. We show that for binary and unordered multinomial choice, the marginal distributions of EV and CV can be expressed as simple closed-form functionals of conditional choice probabilities under essentially unrestricted preference distributions. These results hold even when the distribution and dimension of unobserved heterogeneity are neither known nor identified, and utilities are neither quasilinear nor parametrically specified. The welfare distributions take simple forms that are easy to compute in applications. In particular, average EV for a price rise equals the change in average Marshallian consumer surplus and is smaller than average CV for a normal good. These nonparametric point-identification results fail for ordered choice if the unit price is identical for all alternatives, thereby providing a connection to Hausman–Newey's (2014) partial identification results for the limiting case of continuous choice.

The Path Dependency Problem of Marshallian Consumer's Surplus Revisited

Literature addresses different concepts when dealing with the path dependency problem of Marshallian Consumer’s Surplus (MCS). Under the ‘classical’ version (e.g. Paul A. Samuelson, 1947) the path dependency problem disappears if utility is homothetic. In contrast, the textbook version claims that, also for homothetic utility, multiple price changes produce different MCS variations depending on the path along which prices are changing. This paper shows that path dependence in the textbook sense is not the result of inconsistencies in Marshallian demand theory but from falsely introducing path dependent assumptions on cross-price effects.If instead one follows standard microeconomic reasoning then the textbook version of the path dependency problem disappears; a result which is independent of the underlying utility function.

Consumer' Surplus, Fundamental Welfare Theorems and Revealed Preference Approach

Modern mainstream economics teach us that Marshallian consumer surplus concept can be correctly applied only in the special case of quasilinear preferences (when price of numeraire is normalized to unity), which is never observed in reality. Our paper shows the opposite: we can every time correctly apply individual and aggregate Marshallian surplus approach for the general class of differentiable preferences along subset of monotonous and piecewise monotonous parameterizations. Aggregate generalized consumer surplus - change in the sum of all consumers' incomes and net surpluses - is identically equal to the change in efficient social welfare function, if level of efficient social welfare is changing (piecewise) monotonously along adjustment path. Fundamental welfare theorems are proposed to generalization for potential application of aggregate Marshallian surplus measures and the relation between aggregated revealed preference approach, Coase' theorem, fundamental welfare theorems and representative consumer' approach is discussed.

Competitive Market Efficiency and Income Distribution Non-Optimality: A Theorem on Income Redistribution

Government redistribution is increasingly important in today's world. The effect of income distribution on industrialization and growth, and the causes of income redistribution have been studied in the contemporary literature. The normative significance of income redistribution, however, which is the focus of this paper, has been rarely studied. In this paper we analyze how income redistribution makes a potential Pareto improvement. For a given amount of total income, redistributing more income to consumers who spend relatively more on more elastically supplied goods increases the aggregate expenditure on more elastically supplied goods, while reducing the aggregate expenditure on less elastically supplied goods at the same amount. This paper shows that such reallocation of expenditures results in an increase in the equilibrium output of more elastically supplied goods, more than compensating for the decrease in equilibrium output of less elastically supplied goods. The aggregate Marshallian consumer surplus is raised and the potential Pareto improvement is then achieved. A perfectly competitive market is Pareto optimal for any income distribution at the individual level: all consumers maximize utilities for given income distribution and firms maximize profits. However, the Pareto optimal at the individual level does not ensure that the potential Pareto optimal at aggregate level is realized due to income distribution non-optimality. It is usually believed that income redistribution is aimed to improve social justice. We show in this paper that income redistribution can significantly improve efficiency at aggregate level. Using an example, we show that redistribution can improve social welfare more than 25%. If rich people spend relatively more on inelastically supplied goods than poor people do, the improvements of social justice and aggregate efficiency could move in the same direction. We give a testable condition for efficiency improving redistribution in the general case: if the consumer's sum of expenditure shares, weighted by inverse of 1 plus elasticities of supplies is less than the others' sum, redistributing more income to the consumer will make the potential Pareto improvement.

Efficient Social Welfare Function and Optimal Income Distribution

By showing that increases in the sum of aggregate income and aggregate Marshallian consumer surplus represent potential Pareto improvement, this paper builds a theoretical ground for using aggregate Marshallian consumer surplus as a social welfare indicator. The optimal income distribution that potentially Pareto dominates any other income distribution is studied. It is shown that the income distribution is optimal if and only if the marginal aggregate Marshallian consumer surplus of income is equalized across all consumers. An index that measures income distribution non-optimality rather than inequality is then developed. It is found that the social cost of income distribution non-optimality in a perfect competitive market could be surprisingly high. Finally, a new approach of social welfare function is developed and it is shown that a social welfare function can be expressed by the sum of aggregate income and aggregate Marshallian consumer surplus if and only if the marginal social welfare of a good is equal to its market price.

Spurious deadweight gains

Marshallian consumer surplus (MCS) is generally an inaccurate measure of welfare change because it neglects income effects. Suppose these effects overturn the usual demand response to a price change. Then, the deadweight loss from a distortionary tax or subsidy has the wrong sign, that is, there is a spurious deadweight gain.

Quantity competition with access fees

We analyze an oligopoly model where firms choose both quantities and access fees. Per unit prices are determined endogenously to equate quantity demanded with quantity supplied at each firm. In a Nash equilibrium of the game played by firms, the per unit prices equal marginal cost and access fees may or may not extract all consumer surplus. As the number of firms increases, access fees fall below net consumer surplus and toward zero. Existence is guaranteed if Marshallian consumer surplus is not too concave. With open entry, quantity competition with access fees may be less efficient than without access fees.

The Measurement of Welfare

Harberger (1971) proposes that the consumer surplus should be used to measure the individual utility and the social welfare. Since Harberger's paper, the limitation and pitfall of surplus have been demonstrated systematically and definitively by Chipman and Moore among many others [Slesnick (1998), p. 2159]. As pointed out by Chipman and Moore (1976, p. 70), consumer's surplus is not intended to measure a utility at all; but what is supposed to measure are not told. Despite the serious conceptual problems, however, consumer's surplus is the overwhelming choice as a welfare [Slesnick (1998), p. 2110]. is easy to use, the intuition underlying its interpretation as a welfare measure is transparent, and the data requirements for implementation are minimal [Slesnick (1998), p. 2159]. Using data to directly measure behavior, an to aggregate approach is developed in this paper to measure welfare in a world of many goods with many consumers. The purpose of this paper is to show that there exist some welfare functions such that the change in welfare resulting from changes of prices is equal to the sum of the Marshallian surplus of demands, the surplus of supplies, and the changes in government revenue. Therefore, a theoretical ground is built for using Marshallian consumer surplus as a welfare indicator. It is well known that Marshallian consumer surplus does not measure the utility in the case of a single consumer. How can the Marshallian surplus be an indicator for social welfare? The utility maximization problem gives that marginal utility equals market price times the marginal utility of income (MUI). The market price would measure the marginal utility if the MUI were constant. Unfortunately, the constancy of MUI has proved to be impossible [Samuelson (1942)]. Therefore, the Marshallian surplus does not measure the individual utility. However, It is also well known that the market price measures the marginal social value of a As pointed out in Varian's textbook [Varian (1992), p. 334], we see that the competitive prices measure the (marginal) social value of a good: how much welfare would increase if had a small additional amount of the good. Therefore, it is intuitive that Marshallian consumer surplus could measure welfare, at least in the case of one In the case of many goods, the problem preventing consumer surplus to be a good welfare indicator is known as the path dependency problem. To solve this problem, decompose the change in welfare into two parts. The first part is the change in welfare due to income change, maintaining prices constant, which is shown to be path independent and equal to the sum of the surplus of supplies and the change in government revenue. The second part is the change in welfare due to price changes, maintaining income constant, which is shown to be path independent and equal to the Marshallian consumer surplus of demands.

The linearised Hamiltonian as comprehensive NDP

For guidance in determining which items should be included in comprehensive NDP (net domestic product) and how they should be included, reference is often made to the linearised Hamiltonian from an optimal growth problem. The paper gives a rigorous interpretation of this procedure in terms of a money-metric utility function linked to familiar elements of standard welfare theory. A key insight is that the Hamiltonian itself is a quasilinear utility function, so imposing the money-metric normalisation is simply equivalent to using Marshallian consumer surplus as the appropriate measure of welfare when there are no income effects. The twin concepts of the ‘sustainability-equivalence principle’ and the ‘dynamic welfare-comparison principle’ are explained, and it is indicated why these two principles are important for the theory of national income accounting.

Public Goods as Characteristics of Non-Market Commodities

In benefit-cost analysis, it is useful to model public goods as the quality of privately consumed nonmarketed goods. This strategy is often pursued in valuing environmental amenities. The theoretical foundations of this model have not been fully developed. In this paper, comparative statics results are derived for quality changes of nonmarket goods. The results reveal some common misconceptions about welfare measurement of quality changes. Conditions are presented for a quality-induced change in the Marshallian consumer surplus of the nonmarket good to approximate the 'true' compensated welfare measure. The conditions are equally necessary for obtaining 'exact' welfare measures. Copyright 1993 by Royal Economic Society.

Measuring the consumer welfare effects of carbon penalties: Theory and applications to household energy demand

This study implements a money metric approximation to the Hicksian equivalent variation (HEV) based on observable demand functions. This approach is a less restrictive approximation to the HEV than the Marshallian consumer surplus (MCS) in situations where MCS is misleading. This study also implements a generalized logit demand system that conforms better to the theory of consumer behaviour than standard flexible functional forms, eg translog, the ‘almost ideal demand system’ (AIDS), generalized Leontief and minflex Laurent models. The generalized logit model was estimated using New York state level and company level data on residential consumption of electricity, natural gas and fuel oil. The demand model and money metric were combined to measure the consumer welfare effects of carbon penalties on electricity and fuels. While the application is specific, the generalized logit model of demand and the money metric measure of welfare change can encompass a wider range of applications than conventional methods of analysis.

Bootstrapping in Applied Welfare Analysis

AbstractBootstrapping procedures are used to estimate the statistical properties of common empirical welfare measures. Results from a Monte Carlo experiment indicate that welfare estimates such as Marshallian consumer surplus often exhibit significant bias. Standard errors of welfare estimates are found to often exceed the magnitude of the point estimate for typical cross‐section data sets and are generally larger than the difference between comparable Hicksian and Marshallian measures. Precision of welfare estimates can be markedly enhanced through generating larger data sets, obtaining better model fits, and through imposition of innocuous inequality restrictions on the demand function parameters.

The relation between alternative benefit measures for quantity constrained price subsidies

In this paper we analyse the relation between Hicks' equivalent and compensating variations and Marshallian consumer's surplus for quantity-constrained price subsidies. Using a set of appropriately defined shadow prices we develop expressions that allow straightforward comparison of the alternative measures of welfare change. It turns out that the relative magnitude of the benefit measures crucially depends on the level of the constraint on the subsidized good. Different cases are considered. Among other findings it is shown that, depending on the constraint, Marshallian benefit may substantially overestimate or underestimate the equivalent variation.

A Hicksian Approach to Cost-Benefit Analysis with Discrete-Choice Models

Although Hicksian consumer's surplus are considered the theoretically correct underpinnings of applied welfare economics, the Hicksian approach has not been fully integrated into the discrete-choice literature. This paper presents a new specification of utility functions for discrete-choice models that satisfy both the homogeneity property of demand and Roy's Identity. By solving the path dependency problem inherent in Marshallian measures, this specification permits the derivation of Hicksian measures. The paper presents a novel technique of identifying the entire indirect utility function for transport analysis without data on the complete budget set and with data only on mode choice. The cost-benefit framework advanced here has been used to derive exact theoretical of the welfare impact of changes in prices and quality at both an individual and aggregate level using numerical methods (Hau, 1981, 1983, 1984). In these works, the theoretical framework was applied to a demand-supply corridor simulation model of the San Francisco Bay area using micro-data, thus showing the theoretical model to be empirically viable. Note that the traditional definition and estimate of the valuation of time emerged as a byproduct, further supporting the empirical validity of our theoretical framework. The first attempts to derive an index of user benefit within the travel demand context were those of Neuberger (1971) and Harris and Tanner (1974). These authors defined consumer's surplus as the area to the left of the probabilistic demand functions. Satisfaction of the Hotelling integrability conditions for the equality of cross-partials guarantees path independence, but only the additional condition that the Hessian matrix be negative semidefinite ensures that the demand functions are derived from utility maximization. Several authors derived measures of that are consistent with random utility maximization and established some of their properties (Williams, 1977; Ben-Akiva and Lerman, 1979; and Daly and Zachary, 1978). Domencich and McFadden (1975), Bruzelius (1979), McFadden (1981) and Small and Rosen (1981) demonstrated the connection between neoclassical consumer theory and an accessibility measure. All of these authors employed the constancy of the marginal utility of income or money (numeraire) to justify the use of Marshallian consumer's surplus measures, known to be plagued by the path dependency problem. The main difference between Small and Rosen (SR) and my approach here can be seen in the respective implicit compensation objectives involved.' SR derive an expression for the amount required to compensate an individual for a change in price or quality, given that the individual chooses to consume the

Expected Consumer's Surplus and the Welfare Effects of Price Stabilization

Suppose a consumer faces a price which is uncertain ex ante. A question which often arises is whether the consumer would benefit from a stabilization policy under which the price would then be fixed and known with certainty. Many authors have addressed this question by calculating the expected compensating variation of the price change; others have used expected Marshallian consumer's surplus, often with the explanation that it is a good approximation to expected compensating variation.2 An important unresolved issue, however, is whether expected compensating variation does in fact provide a valid ranking of stochastic prices against stabilized prices, i.e., a ranking in agreement with that given by expected utility. In Section 2, we demonstrate that expected compensating variation is not in general a valid utility indicator. In essence, while utility comparisons under uncertainty require the use of the cardinal properties of (von NeumannMorgenstern) utility functions, the expected surplus measures depend only on ordinal preference rankings. Expected compensating variation, then, is completely insensitive to, and cannot reflect, the precise factor of interest in suchstudies: the consumer's attitudes toward risk. We then derive a set of restrictions on the utility function which are necessary in order for expected compensating variation to be a valid measure. We see that price stabilization policies can only be evaluated with compensating variation if consumer preferences are assumed to satisfy quite stringent requirements. This is in constrast to the familiar certainty case in which compensating variation always provides correct rankings.

The Welfare Cost of Hong Kong's Public Housing Programme

Public housing is an important source of accommodation in Hong Kong. Subsidies to public housing are tied to the consumption of housing services. Consumer's consumption pattern will therefore be distorted, and a welfare loss incurred as compared to an equivalent cash transfer. This paper seeks to measure the extent to which tenants' benefit from public housing subsidies. A measure of net tenant benefit is used, which is based upon the Marshallian consumer surplus concept. The results indicate that Hong Kong's public housing programme has had a significant impact upon households' consumption patterns, and that the welfare loss is relatively low.

Estimating compensating and equivalent income variations from hedonic price models

Estimates of welfare changes obtained from hedonic price models usually consist of changes in Marshallian consumer's surplus. This note shows how compensating and equivalent income variations can be computed from the information available in hedonicprice models.