Prices and welfare
What is the welfare effect of a price change? This simple question is one of the most relevant and controversial questions in microeconomic theory and its different answers can lead to severe heterogeneity in empirical results. This paper returns t...
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| Format: | Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2016
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| Online Access: | http://documents.worldbank.org/curated/en/2016/02/25927341/prices-welfare http://hdl.handle.net/10986/23897 |
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okr-10986-238972021-04-23T14:04:18Z Prices and welfare Araar, Abdelkrim Verme, Paolo PRICE DECREASES PARTICULAR COUNTRY SUBSTITUTION WELFARE ECONOMICS PRICE INCREASES UTILITY FUNCTIONS SUBSTITUTE GOODS DEMAND FUNCTIONS INDEX NUMBERS SALES INCOME INTEREST GOVERNMENT REVENUES EXCHANGE UTILITY MAXIMIZATION INFORMATION DEVELOPING COUNTRIES ELASTICITY ENGEL CURVE WELFARE DISTRIBUTION VARIABLES TAX SYSTEMS PRICING PRICE TAX REAL INCOME PC OPEN ACCESS PRICE VARIATION CHOICE DATA PRICE STRUCTURE SAVINGS CONSUMER SURPLUS MONEY FOOD PRICE PRICE_INDEX OUTPUTS SURPLUS PRODUCTS ECONOMETRICS COST OF LIVING PRODUCTIVITY DEMAND CURVES INCOME EFFECTS PRICE SCHEDULE WEB ECONOMICS LITERATURE CONSUMER PREFERENCES PRICE ELASTICITY PRODUCT UTILITY NOMINAL INCOME CONSUMER DEMAND SUBSTITUTES SUBSIDIES ECONOMIC RESEARCH TAXES PRICE CHANGE EXPENDITURE NORMAL GOOD TRANSACTIONS EQUITY CONSUMPTION RELIABILITY SURPLUSES SUBSTITUTE WAGES RESULTS PRICE ADJUSTMENTS LORENZ CURVE MARKET PRICES VALUE ELECTRICITY FREE MARKET DEMAND UTILITY FUNCTION DEMAND FUNCTION PRICE CHANGES EXPENDITURES AGRICULTURE CONSUMERS INCOMES What is the welfare effect of a price change? This simple question is one of the most relevant and controversial questions in microeconomic theory and its different answers can lead to severe heterogeneity in empirical results. This paper returns to this question with the objective of providing a general framework for the use of theoretical contributions in empirical works, with a particular focus on poor people and poor countries. Welfare measures (such as Equivalent Variation or Consumer's Surplus) and computational methods (such as Taylor's approximations or the Vartia method) are compared to test how these choices result in different welfare measurement under different price shock scenarios. As a rule of thumb and irrespective of parameter choices, welfare measures converge to approximately the same result for price changes below 10 percent. Above this threshold, these measures start to diverge significantly. Budget shares play an important role in explaining such divergence, whereas the choice of demand system has a minor role. Under standard utility assumptions, the Laspeyers and Paasche variations are always the outer bounds of welfare estimates and consumer surplus is always the median estimate. The paper also introduces a new simple welfare approximation, clarifies the relation between Taylor's approximations and the income and substitution effects, and provides an example for treating nonlinear pricing. Stata codes for all computations are provided in annex. 2016-03-09T18:00:55Z 2016-03-09T18:00:55Z 2016-02 Working Paper http://documents.worldbank.org/curated/en/2016/02/25927341/prices-welfare http://hdl.handle.net/10986/23897 English en_US Policy Research Working Paper;No. 7566 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
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Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
PRICE DECREASES PARTICULAR COUNTRY SUBSTITUTION WELFARE ECONOMICS PRICE INCREASES UTILITY FUNCTIONS SUBSTITUTE GOODS DEMAND FUNCTIONS INDEX NUMBERS SALES INCOME INTEREST GOVERNMENT REVENUES EXCHANGE UTILITY MAXIMIZATION INFORMATION DEVELOPING COUNTRIES ELASTICITY ENGEL CURVE WELFARE DISTRIBUTION VARIABLES TAX SYSTEMS PRICING PRICE TAX REAL INCOME PC OPEN ACCESS PRICE VARIATION CHOICE DATA PRICE STRUCTURE SAVINGS CONSUMER SURPLUS MONEY FOOD PRICE PRICE_INDEX OUTPUTS SURPLUS PRODUCTS ECONOMETRICS COST OF LIVING PRODUCTIVITY DEMAND CURVES INCOME EFFECTS PRICE SCHEDULE WEB ECONOMICS LITERATURE CONSUMER PREFERENCES PRICE ELASTICITY PRODUCT UTILITY NOMINAL INCOME CONSUMER DEMAND SUBSTITUTES SUBSIDIES ECONOMIC RESEARCH TAXES PRICE CHANGE EXPENDITURE NORMAL GOOD TRANSACTIONS EQUITY CONSUMPTION RELIABILITY SURPLUSES SUBSTITUTE WAGES RESULTS PRICE ADJUSTMENTS LORENZ CURVE MARKET PRICES VALUE ELECTRICITY FREE MARKET DEMAND UTILITY FUNCTION DEMAND FUNCTION PRICE CHANGES EXPENDITURES AGRICULTURE CONSUMERS INCOMES |
| spellingShingle |
PRICE DECREASES PARTICULAR COUNTRY SUBSTITUTION WELFARE ECONOMICS PRICE INCREASES UTILITY FUNCTIONS SUBSTITUTE GOODS DEMAND FUNCTIONS INDEX NUMBERS SALES INCOME INTEREST GOVERNMENT REVENUES EXCHANGE UTILITY MAXIMIZATION INFORMATION DEVELOPING COUNTRIES ELASTICITY ENGEL CURVE WELFARE DISTRIBUTION VARIABLES TAX SYSTEMS PRICING PRICE TAX REAL INCOME PC OPEN ACCESS PRICE VARIATION CHOICE DATA PRICE STRUCTURE SAVINGS CONSUMER SURPLUS MONEY FOOD PRICE PRICE_INDEX OUTPUTS SURPLUS PRODUCTS ECONOMETRICS COST OF LIVING PRODUCTIVITY DEMAND CURVES INCOME EFFECTS PRICE SCHEDULE WEB ECONOMICS LITERATURE CONSUMER PREFERENCES PRICE ELASTICITY PRODUCT UTILITY NOMINAL INCOME CONSUMER DEMAND SUBSTITUTES SUBSIDIES ECONOMIC RESEARCH TAXES PRICE CHANGE EXPENDITURE NORMAL GOOD TRANSACTIONS EQUITY CONSUMPTION RELIABILITY SURPLUSES SUBSTITUTE WAGES RESULTS PRICE ADJUSTMENTS LORENZ CURVE MARKET PRICES VALUE ELECTRICITY FREE MARKET DEMAND UTILITY FUNCTION DEMAND FUNCTION PRICE CHANGES EXPENDITURES AGRICULTURE CONSUMERS INCOMES Araar, Abdelkrim Verme, Paolo Prices and welfare |
| relation |
Policy Research Working Paper;No. 7566 |
| description |
What is the welfare effect of a price
change? This simple question is one of the most relevant and
controversial questions in microeconomic theory and its
different answers can lead to severe heterogeneity in
empirical results. This paper returns to this question with
the objective of providing a general framework for the use
of theoretical contributions in empirical works, with a
particular focus on poor people and poor countries. Welfare
measures (such as Equivalent Variation or Consumer's
Surplus) and computational methods (such as Taylor's
approximations or the Vartia method) are compared to test
how these choices result in different welfare measurement
under different price shock scenarios. As a rule of thumb
and irrespective of parameter choices, welfare measures
converge to approximately the same result for price changes
below 10 percent. Above this threshold, these measures start
to diverge significantly. Budget shares play an important
role in explaining such divergence, whereas the choice of
demand system has a minor role. Under standard utility
assumptions, the Laspeyers and Paasche variations are always
the outer bounds of welfare estimates and consumer surplus
is always the median estimate. The paper also introduces a
new simple welfare approximation, clarifies the relation
between Taylor's approximations and the income and
substitution effects, and provides an example for treating
nonlinear pricing. Stata codes for all computations are
provided in annex. |
| format |
Working Paper |
| author |
Araar, Abdelkrim Verme, Paolo |
| author_facet |
Araar, Abdelkrim Verme, Paolo |
| author_sort |
Araar, Abdelkrim |
| title |
Prices and welfare |
| title_short |
Prices and welfare |
| title_full |
Prices and welfare |
| title_fullStr |
Prices and welfare |
| title_full_unstemmed |
Prices and welfare |
| title_sort |
prices and welfare |
| publisher |
World Bank, Washington, DC |
| publishDate |
2016 |
| url |
http://documents.worldbank.org/curated/en/2016/02/25927341/prices-welfare http://hdl.handle.net/10986/23897 |
| _version_ |
1764455093685452800 |