Surplus Measures Research Articles

Total factor productivity and relative prices: the case of Italy

<abstract><p>In his seminal work, Fontela (1989) set up the distributional rule of productivity gain in the input–output context (total factor productivity surplus, TFPS). Garau (1996) proposed an extension, to identify a measure of surplus, called purchasing power transfer (PPT). This measure is given by the productivity gains and market surplus generated by the extra-profit conditions derived from the rental positions detained by agents. Such a decomposition is useful because it provides information about the degree of non–competitiveness in different markets. In this paper, we compute and explain Fontela's (1989) TFPS by comparing it with Garau's (1996) PPT for Italy over 2009–2014.</p></abstract>

Utility foundation of a Cobb-Douglas demand function with two attributes

ABSTRACT It is known how to derive, from a utility maximization programme, a Cobb-Douglas demand function depending on the sole product price. This article shows how to derive a Cobb-Douglas demand function, which depends on both the product price and quality. More broadly, it offers a normative foundation, with a quasi-linear utility function, to the use of a Cobb-Douglas demand function of two attributes. It also provides simple measures of consumer surplus and social welfare.

Speed of person perception affects immediate and ongoing aesthetic evaluation

Recent studies have shed light on how aesthetic judgments are formed following presentations lasting less than a second. Meanwhile, dedicated neural mechanisms are understood to enable the rapid detection of human faces, bodies, and actions. On the basis of cognitive studies of: (i) the speed and acuity of person perception, and (ii) preferential attention given to human imagery (e.g., faces and bodies), we hypothesize that the visual detection of humans in portraits increases the magnitude and stability (i.e., similarity to later responses) of aesthetic ratings. Ease of person perception is also expected to elicit longer durations of preferential viewing time, a surplus measure of viewing behavior that should be positively related to subsequent ratings. To test these ideas, we use a set of cubist portraits previously established to be more or less categorizable in terms of the aggregate time required to perceive the depicted person. Using these images, we track aesthetic judgments made following short and unconstrained presentations; in an intervening task, we measure viewing behavior when subjects are able to selectively reveal regions of these images. We find that highly categorizable artworks (those that require less time to identify the figure as human) elicit higher and more predictive aesthetic ratings following 30 ms presentations while also eliciting longer viewing durations. Changes in ratings throughout the task are positively correlated with cumulative viewing time; critically, an image's categorizability level further moderates the strength of this relationship. These results demonstrate that a particular kind of visual object recognition – the recognition of human forms – modulates aesthetic preferences at a glance, subsequent viewing patterns, as well as rating changes over time.

Fixed Costs and Recreation Value

AbstractWelfare measures from travel cost models net out variable costs such as travel expenses specific to each trip. Costs that are fixed in the short run, such as expenses for equipment that is used over multiple trips, are typically ignored and implicitly netted out. The resulting net value of recreation trips, or consumer surplus, is appropriate for long‐run analysis when consumers can fully adjust their expenditures. However, in cases where some costs are difficult to adjust in the short run, such as when boat owners do not sell their boats in response to the transient effects of an oil spill, traditional consumer surplus measures underestimate the total welfare change. We explain this underestimation and show how to correct for it by adjusting traditional consumer surplus estimates upward. We illustrate our procedure using a model of recreational boating developed to assess damages from the Deepwater Horizon oil spill. In that case, accounting for boating fixed costs resulted in a 50% increase in estimated value relative to estimates of consumer surplus alone.

The value of slow travel: Economic appraisal of cycling projects using the logsum measure of consumer surplus

Walking and cycling have clear benefits for users, even though they may be slower than other transport modes. However, these user benefits could be undervalued using traditional economic appraisal, in which speed increases or travel time savings are highly valued. This paper explores the use of the logsum measure of consumer surplus for valuing the user benefits of new active transport infrastructure, using new separated cycleways in Sydney (Australia) as a case study. The results suggest the value of user benefits can be significant – of a similar order of magnitude to the estimated value of the public health benefits – and it becomes more pronounced as cycleways are integrated into a connected network. The method could be used to inform transportation investment policy decisions in other jurisdictions, where suitable travel survey data are available.

How transport costs affect the decision to purchase a new or a remanufactured good

We provide the first strategic analysis of the interaction between a continuum of potentially green consumers and two firms in regional science. Firm 1 (2) sells new (remanufactured) toner cartridges. Each firm selects its price and a consumer purchases from the firm that offers her the highest utility. Utility is given by a surplus measure, the price, and by the transport cost incurred in traveling to a firm’s location. We first derive the best response functions of the two firms. Second, we stipulate a numerical value for the surplus measure and show that when the two firms select their “monopoly” prices, the Nash equilibrium is unique. Third, we specify a linear transport cost function with a constant coefficient and show that the costlier it is for consumers to get to the locations of the two firms, the higher is the price charged by these two firms. Finally, our analysis shows that there is a need to study models in which the two toner cartridges are dissimilar, the interaction between consumers and firms is repeated, and behavioral factors are taken into account.

A note on Ramsey pricing and the structure of preferences

We represent quasi-linear preferences by the dual measure of consumer surplus, and investigate demand and the associated optimal pricing. In particular, we discuss substitutability with respect to the outside commodity, deriving a Slutsky-like decomposition of the price effects. We use our results to show that commodities with larger outside substitutability have smaller optimal Lerner indexes, and that Ramsey prices are always proportional to marginal costs only if preferences are fully homothetic.

Consumer surplus for random regret minimisation models

ABSTRACTThis paper is the first to develop a measure of consumer surplus for the Random Regret Minimisation (RRM) model. Following a not so well-known approach proposed two decades ago, we measure (changes in) consumer surplus by studying (changes in) observed behaviour, i.e. the choice probability, in response to price (changes). We interpret the choice probability as a well-behaved approximation of the probabilistic demand curve and accordingly measure the consumer surplus as the area underneath this demand curve. The developed welfare measure enables researchers to assign a measure of consumer surplus to specific alternatives in the context of a given choice set. Moreover, we are able to value changes in the non-price attributes of a specific alternative. We illustrate how differences in consumer surplus between random regret and random utility models follow directly from the differences in their behavioural premises.

ASSESSING LANDSAT FRACTIONAL GROUND-COVER TIME SERIES ACROSS AUSTRALIA’S ARID RANGELANDS: SEPARATING GRAZING IMPACTS FROM CLIMATE VARIABILITY

Abstract. Suitable measures of grazing impacts on ground cover, that enable separation of the effects of climatic variations, are needed to inform land managers and policy makers across the arid rangelands of Australia. This work developed and tested a time-series, changepoint detection method for application to time series of vegetation fractional cover derived from Landsat data to identify irregular and episodic ground-cover growth cycles. Utilising the High Performance Computing power of the Google Cloud Compute Engine these cycles were segmented to distinguish grazing impacts from that of climate variability. A measure of grazing impact was developed using a multivariate technique to quantify the rate and degree of ground cover change. The method was successful in detecting both long term and short term growth cycles. Growth cycle detection was assessed against rainfall surplus measures indicating a relationship with high rainfall periods. During periods of ground cover decline, grazing utilisation was observed across four major grasslands. Ground cover change associated with grazing impacts was also assessed against field measurements of ground cover indicating a relationship between both field and remotely sensed ground cover. Cause and effects between grazing practices and ground cover resilience can now be explored in isolation to climatic drivers. This is important to the long term balance between ground cover utilisation and overall landscape function and resilience.

PPP motorway ventures – an optimization model to locate interchanges with social welfare and private profit objectives

ABSTRACTThis paper proposes two optimization models for locating motorway interchanges when dealing with public–private partnerships. The models innovate by considering simultaneously the conflicting goals of the two main parties involved, government and concessionaires, in their pursuit to maximize social welfare benefits and profits, respectively. The models maximize social welfare benefits (using a consumers' surplus measure) such that a given level of profits is ensured, being one deterministic and the other stochastic. The application of the models to a real case study, involving the A25 motorway in Portugal, show that they can help determine win–win solutions for both government and concessionaires, that is, solutions with high levels of profits and social welfare benefits.

Would competition between air transport and high-speed rail benefit environment and social welfare?

We develop a duopoly model to analyze the impact of air transport and high-speed rail (HSR) competition on the environment and social welfare. We show that the introduction of HSR may have a net negative effect on the environment, since it may result in additional demand, i.e., there is a trade-off between the substitution effect and the traffic generation effect. Furthermore, if environmental externalities are taken into account when assessing social welfare, the surplus measure may be higher when only air transport serves the market than when the two modes compete. When the airline and the HSR operator decide frequencies, the airline reduces the aircraft size in order to keep load factors high while offering lower frequency and carrying fewer passengers. In these circumstances, the introduction of HSR may be beneficial to the environment on a per seat basis only if the market size is large enough. When the HSR operator decides speed, it has incentive to keep it at the maximum level in order to reduce travel time. When the increase in the emissions of HSR due to the increase in the speed of the train is sufficiently high, the overall level of emissions grows after the introduction of HSR. Therefore, there can be a trade-off between the attractiveness of the service due to reduced travel time and the effects on the environment.

Quality-Adjusted Consumer Surplus: Measurement, Effects, and Determinants in Online Markets

The traditional measure of consumer surplus (CS) (willingness to pay minus price paid) is captured at the time the transaction takes place, implicitly assuming that actual quality received (ex-post) is identical to quality expected (ex-ante). However, when the exchange of goods does not occur simultaneously when the transaction takes place, and for services whose quality is difficult to be fully specified before the transaction, the traditional measure of CS may be biased because actual quality received ex-post may differ from quality expected ex-ante. Drawing upon the economics and satisfaction literature, we relax the assumption that consumers receive, ex-post, identical quality that they expected ex-ante, and we propose, operationalize, and test a quality-adjusted measure of CS (termed CS’) in the context of online markets for IT services. Our empirical results first show that the traditional measure of CS systematically over-estimates surplus than the quality-adjusted measure CS’. Second, quality-adjusted CS’ better predicts consumers’ subsequent transactions (i.e., consumer continuance in the online market, number of future contracts, and total spending) while the traditional measure of CS fails to predict consumers’ subsequent transactions. This finding suggests that quality-adjusted CS’ is a more realistic estimate of consumer surplus by predicting future transactions. Building upon expectation confirmation theory, we examine the difference between the two surplus measures (termed ∆CS), which reflects “surprise utility” from ex-post confirmation of expectations. Surprise utility (∆CS) (either positive or negative) is determined by market immaturity, consumers’ lack of experience in the market, and consumers’ lack of familiarity with IT service providers. Implications for developing a more conservative (quality-adjusted) measure of consumer surplus that better reflects economic reality are discussed.

The economic value to smokers of graphic warning labels on cigarettes: Evidence from combining market and experimental auction data

Many countries now require prominent pictorial health warning labels (HWLs) on the front and back of cigarette packages. In the US, pictorial HWLs have been adopted, but tobacco industry litigation has delayed their implementation. This intervention could have value to smokers, if it increases their information and changes their smoking behavior. In this paper we estimate the value of two different health warning labels for cigarette packages relative to the current US labeling policy. Our methodology does not depend on the personal values of policy makers or other individuals, as the value of information estimates we derive are based solely on smokers’ own consumption choices, not any public health or other effects. We introduce an approach to valuing information with a surplus measure that couples willingness-to-pay from non-hypothetical experimental auctions with time-series revealed preference demand estimates. We find that a pictorial HWL has a large value to smokers, and a higher value than a label that only contains text, insofar as changing purchase behavior.

Reconsidering Donations for Nonmarket Valuation

Researchers employing the stated-preference technique of contingent valuation have a history of using donations to value public goods despite conceptual differences between willingness to pay and willingness to donate. The practice is justified based on an understanding that willingness to donate can serve as a theoretical lower bound of the appropriate measure of Hicksian surplus. This paper shows that the basis for this understanding in the literature is incomplete and potentially misleading. If donations are used in valuation surveys, greater attention is needed to ensure consistency between the way stated preferences are elicited and donations would occur in practice.

Fiscal Equalization Schemes and Fiscal Sustainability

Fiscal sustainability tests have largely ignored the institutional setting of fiscal policy making. Fiscal equalization schemes in federal states are one such institution. We examine whether German state governments pursue sustainable fiscal policies taking into account fiscal equalization transfers. Using panel data techniques we assess fiscal sustainability by investigating whether the debt-to-GDP-ratio has had a positive influence on the primary surplus (Bohn-model). Distinguishing between different measures of the primary surplus we show that including/excluding fiscal transfers changes the results of the Bohn-model. While fiscal equalization transfers do render the fiscal policy of the states sustainable they also provide the states with incentives to increase government spending which, eventually, might render the entire equalization scheme politically unsustainable.

Contingent Valuation And Recreational Demand

A contingent valuation model is developed to estimate the value of the recreational experience for visitors to Reelfoot Lake in northwestern Tennessee. Hicksian compensating variation measures of consumer surplus were estimated. Individual willingness-to-pay and aggregate willingness-to-pay were calculated for the lake.

Evaluating the effects of urban congestion pricing: geographical accessibility versus social surplus

In urbanised areas around the world, road pricing policies are considered more and more frequently, the aim often being to alleviate (some of the) external traffic-related costs. To assess the effects of a proposed road pricing measure, several evaluation measures can be used, coming from different disciplines, including economics, transportation science and transport geography. In this paper, we compare two types of evaluation measure that can be used to assess the effectiveness of road pricing measures: geographical accessibility measures and economic social surplus measures. We explore the possibilities of both types of measure in terms of evaluating road pricing effects from a theoretical perspective, as well as comparing their outcome measures for a research area in the Netherlands. By means of correlation analysis and spatial comparison of outcomes, we find that geographical accessibility measures, being simpler and easier to interpret than economic measures, offer a poor proxy of the outcomes of the economic evaluation measures and vice versa. Therefore, the decision whether to use economic surplus measures or geographical accessibility indicators to a large extent depends on the research goal. If the goal is to gain a thorough insight into the monetary gains/losses resulting from a policy measure, economic measures, such as the rule-of-half or the logsum measure, are preferable. However, if there are concrete questions about the changes in accessibility of certain types of activity locations, geographical indicators, such as the contour and potential measures, are more appropriate. The outcomes of such geographical measures, and especially those of the contour measures, are, however, sensitive to the spatial distribution of activity locations in the area under study and to the selection of the impedance parameter that has to be selected in advance to compute the effects. Therefore, if geographical indicators are to be used, it would be wise to use different sensitivity parameters. It is only then that a thorough insight can be gained into the (sensitivity of) geographical accessibility effects.

Dynamic cost–benefit analysis of large projects: The role of capital cost

This paper derives a dynamic cost–benefit rule for evaluating large projects. We show that, in addition to the conventional income and consumer surplus measures, the rule also entails an extra term involving capital cost changes.

On the relationship between airport pricing models

Airport pricing papers can be divided into two approaches. In the traditional approach the demand for airport services depends on airport charges and on congestion costs of both passengers and airlines; the airline market is not formally modeled. In the vertical-structure approach instead, airports provide an input for an airline oligopoly and it is the equilibrium of this downstream market which determines the airports’ demand. We prove, analytically, that the traditional approach to airport pricing is valid if air carriers have no market power, i.e. airlines are atomistic or they behave as price takers (perfect competition) and have constant marginal operational costs. When carriers have market power, this approach may result in a surplus measure that falls short of giving a true measure of social surplus. Furthermore, its use prescribes a traffic level that is, for given capacity, smaller than the socially optimal level. When carriers have market power and consequently both airports and airlines behave strategically, a vertical-structure approach appears a more reasonable approach to airport pricing issues.

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.