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.
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Creation-Date: February 1988
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