Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 598: Consumer's Welfare and Change in Stochastic Partial-Equilibrium Price

Johan Stennek. ()
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Johan Stennek.: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 91 Stockholm, Sweden

Abstract: First, I show that the expected consumer's surplus is equivalent to ex ante compensating variation if and only if the consumer is risk neutral, and the consumer's income elasticity of demand for the commodity is zero. Moreover, the conditions are equivalent to the von Neuman - Morgenstern utility function being quasi-linear. Second, I show that the expected consumer's surplus is an approximation for the consumer's welfare, measured by expected utility, also if the expenditure share is small. Third, I propose a formula to evaluate approximately the consumer's welfare, measured both by expected utility and by ex ante compensating variation, when the above conditions are not met.

Keywords: expected consumer's surplus; consumer's welfare; ex ante compensating variation

JEL-codes: D11

27 pages, October 30, 1997

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