Consumer's Surplus without Apology: Comment
Abstract
Over the past several years there has been a considerable resurgence of interest in the theory of consumer's surplus with the general aim of identifying those circumstances under which it may serve as a viable welfare indicator. In a recent issue of this Review and in this vein, Robert Willig has attempted to establish criteria or rules of thumb for determining when consumer's surplus may reasonably approximate the equivalent and compensating variations. Unfortunately, his striking conclusions are based on some rather special assumptions which severely limit the applicability of his approach. In this comment, I shall first examine the two main problems with Willig's approach: (a) it cannot be easily generalized to cases where the prices of several commodities vary; (b) it is valid only when price and income changes are relatively small. Second, I shall present some numerical examples to illustrate that the magnitudes of error involved in Willig's approach may be far from negligible. Finally, his procedures are contrasted with the one recently presented by Ivor F. Pearce and the author, which enables an exact, not an approximate, money metric welfare indicator to be constructed on the basis of observable information.
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