SFB 303 Discussion Paper No. A - 168

Author: Ebert, Udo
Title: Consumer's Welfare and Price Uncertainty
Abstract: The measurement of welfare under price uncertainty is an issue economists discovered already some decades ago. This paper deals only with one side of the market, namely the consumer's welfare. The article is concerned with some theoretical problems of the evaluation of welfare gains or losses. At the beginning the case of price certainty is discussed. The lessons one can learn within this framework are summarized. They are important for the stochastic setting as well. The main part of the paper investigates welfare measures under price uncertainty. It is demonstrated that the usual indicators as the expected equivalent and compensating variation an d the expected Marshallian consumer's surplus are reliable only in very few situations. Until now it is well known (cf. Helms (1984, 1985)) that they are valid measurers if the corresponding cardinal utility function has certain properties. The new important result is the insight that these measures are only valid if the underlying preference ordering satisfies certain restrictions. In general they are invalid. Therefore these indicators cannot be used in theoretical or applied studies.
Creation-Date: February 1988
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