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A General Equilibrium Analysis of Partial-Equilibrium Welfare Measures: The Case of Climate Change

American Economic Review 1987 77(3), 331-341
This paper uses computable general equilibrium models to demonstrate that partial-equilibrium welfare measures can offer reasonable approximations of the true welfare changes for large exogenous changes. With consistency in the size and direction of the indirect price effects associated with large shocks, single-sector partial-equilibrium measures will exhibit small errors. Otherwise the errors can be substantial and difficult to sign.