The Welfare Economics of Public Policy: A Practical Approach to Project And Policy Evaluation

by Just, Richard E.; Hueth, Darrell L.; Schmitz, Andrew

• ISBN13: 9781845425784
• ISBN10: 1845425782
• Format: Paperback
• Copyright: 2005-12-01
• Publisher: Edward Elgar Pub

Table of Contents

Preface	xv
1 Introduction	1	(13)
1.1 Positive versus normative economics	3	(2)
1.2 Some controversies in welfare economics	5	(3)
1.3 Compensation in welfare economics	8	(1)
1.4 Compensating and equivalent variations	9	(1)
1.5 Efficiency and equity	10	(1)
1.6 Welfare weightings	11	(1)
1.7 Overview of the book	12	(2)
2 Pareto optimality and the Pareto criterion	14	(18)
2.1 Pareto optimality and the Pareto criterion defined	15	(1)
2.2 The pure consumption case	16	(2)
2.3 Production efficiency	18	(3)
2.4 The product-mix case	21	(2)
2.5 Pareto optimality and competitive equilibrium	23	(6)
The first optimality theorem	24	(4)
The second optimality theorem	28	(1)
2.6 Limitations of Pareto optimality and the Pareto principle	29	(2)
2.7 Conclusions	31	(1)
3 The compensation principle and the welfare function	32	(17)
3.1 The compensation principle	32	(6)
The pure consumption case	33	(1)
Distribution of different bundles	34	(1)
The reversal paradox	35	(2)
Intransitive rankings	37	(1)
3.2 Utility possibility curves and the potential welfare criterion	38	(2)
3.3 The social welfare function	40	(1)
3.4 Limitations of the social welfare function approach	41	(4)
3.5 Potential versus actual gains	45	(1)
3.6 Practical applied policy analysis: the relationship of general equilibrium and partial equilibrium analysis	45	(3)
3.7 Summary	48	(1)
4 Welfare measurement for the producer	49	(49)
4.1 The profit-maximizing firm	49	(3)
4.2 Welfare measures for the producing firm	52	(4)
Profit	52	(2)
Producer surplus and quasirent	54	(2)
4.3 The relationship of profit, quasirent and producer surplus	56	(2)
4.4 Producer welfare measurement in the input market	58	(8)
The single-variable-input case	59	(3)
The case of multiple inputs	62	(4)
4.5 Evaluation of nonprice benefits	66	(1)
4.6 Input quantity restrictions for the competitive firm	67	(3)
4.7 Investment and intertemporal welfare measurement	70	(3)
4.8 Summary	73	(2)
Appendix to Chapter 4: Alternative measures of producer welfare in factor and product markets	75	(23)
4.A Sequential evaluation of a multiple price change	76	(2)
4.B Evaluation of a multiple price change in the output market	78	(1)
4.C Evaluation of a multiple price change in a single-input market	79	(1)
4.D An example	80	(2)
4.E Integrability and unique measurement in practice	82	(3)
4.F A simple intertemporal model of producer investment	85	(8)
4.G Alternative behavioral criteria and robustness of surplus measures	93	(5)
5 Consumer surplus and consumer welfare	98	(25)
5.1 The notion of consumer surplus	99	(3)
5.2 Path dependence of consumer surplus	102	(3)
5.3 Uniqueness of consumer surplus	105	(4)
5.4 Constancy of the marginal utility of income	109	(3)
5.5 Conclusions	112	(1)
Appendix to Chapter 5: Nonuniqueness of consumer surplus	113	(10)
5.A The pure consumer case	113	(4)
5.B Path dependence of consumer surplus	117	(2)
5.C Money measures of utility change and constancy of the marginal utility of income	119	(4)
6 Willingness to pay and consumer welfare	123	(60)
6.1 Willingness-to-pay measures	123	(7)
6.2 The nibble paradox	130	(1)
6.3 Equality of compensating and equivalent variation	131	(1)
6.4 Graphical analysis of willingness to pay	132	(4)
6.5 Consumer surplus as a WTP measure: the single-price-change case	136	(5)
6.6 Consumer surplus as a WTP measure: the multiple-price-change case	141	(10)
6.7 Consumer surplus as a WTP measure: the price—income-change case	151	(2)
6.8 Exact measurement of WTP	153	(2)
6.9 Conclusions	155	(2)
Appendix to Chapter 6: Welfare measurement for consumers	157	(26)
6.A WTP measures for consumers	158	(3)
6.B Practical aspects of WTP measures	161	(9)
The single-price-change case	161	(5)
The multiple-price-change case	166	(2)
Computation of tighter error bounds	168	(2)
Conclusions for the pure consumer case	170	(1)
6.C The choice of measure and the money metric	170	(2)
6.D Accurate measurement with ordinary demands	172	(3)
6.E Practical approximation versus accurate measurement	175	(2)
6.F Exact measurement with integrability	177	(6)
7 Factor supply and factor owner welfare	183	(70)
7.1 Initial considerations in factor owner welfare measurement	183	(2)
7.2 Endogenous versus exogenous income	185	(1)
7.3 Path dependence and related issues	186	(3)
7.4 Willingness to pay revisited	189	(2)
7.5 Surplus change as an approximation of WTP	191	(4)
7.6 The general price change case for the factor owner	195	(5)
7.7 Multiple price changes with changes in exogenous income	200	(1)
7.8 An example	200	(3)
7.9 Imposed quantity changes	203	(5)
7.10 Areas between supply (or demand) curves as welfare measures for multiple changes	208	(6)
Welfare analysis with essential goods: evaluating multiple price changes in a single market	209	(3)
Weak complementarity: welfare analysis for nonessential goods	212	(2)
7.11 Exact measurement of WTP for factor owners	214	(1)
7.12 Summary and conclusions	214	(2)
Appendix to Chapter 7: Welfare measurement for factor owners	216	(37)
7.A The case with consumption and labor supply	216	(3)
7.B Money measures of utility change for labor suppliers	219	(2)
7.C WTP measures for consumer-laborers	221	(2)
7.D Separability of consumption and factor supply	223	(2)
7.E Approximate measurement of WTP for consumer-laborers	225	(2)
7.F The general factor supply problem	227	(5)
7.G Benefit measurement with household production	232	(6)
7.H Exact measurement and integrability for factor owners	238	(4)
7.I Indirect benefit measurement for price and nonprice changes	242	(4)
7.J Approximate WTP measures with quantity restrictions	246	(7)
8 Aggregation and economic welfare analysis of market-oriented policies	253	(58)
8.1 Aggregation of WTP: the producer case	253	(3)
8.2 Aggregation of WTP: the case of consumers and factor owners	256	(1)
8.3 Aggregation of money measures of utility change	257	(2)
8.4 Aggregation of WTP over producers and consumers	259	(3)
8.5 Welfare analysis of simple market distortions	262	(7)
Price ceilings	262	(1)
Price floors	263	(1)
Price supports	264	(1)
Taxes	264	(2)
Subsidies	266	(1)
Quotas and market rationing	266	(1)
An example	267	(2)
8.6 Laissez-faire and government intervention	269	(1)
8.7 International trade	269	(15)
The gains from trade	269	(3)
The distribution of gains and losses across trading partners	272	(3)
Trade and government programs	275	(2)
Tariffs, quotas and export subsidies	277	(5)
Voluntary export restraints	282	(2)
8.8 Empirical considerations in market-level welfare analysis	284	(7)
8.9 The choice of market for estimation	291	(1)
8.10 Conclusions	292	(2)
Appendix to Chapter 8: Measurement of aggregate market welfare	294	(17)
8.A Aggregation of WTP for consumer demand and factor supply	294	(4)
8.B Aggregation under heterogeneity for producers	298	(8)
Integrability under aggregation	300	(1)
Modeling producer heterogeneity	301	(5)
8.C Aggregation under heterogeneity for consumers and factor owners	306	(6)
Modeling consumer and factor owner heterogeneity	307	(1)
Exact aggregation	308	(3)
9 Multimarket analysis and general equilibrium considerations	311	(64)
9.1 Welfare effects in vertically related markets	312	(10)
Producer surplus associated with equilibrium supply	312	(4)
Intermediate-market consumer surplus with equilibrium demand	316	(2)
Vertical-sector welfare analysis	318	(1)
Extension to factor supply and final consumer demand	319	(3)
9.2 Welfare effects in horizontally related markets	322	(5)
Input-market relationships for industries	322	(2)
Output-market relationships for industries	324	(2)
Horizontal relationships for consumers and factor owners	326	(1)
9.3 General equilibrium welfare measurement	327	(4)
9.4 Welfare measurement with existing distortions in other markets	331	(5)
9.5 General equilibrium considerations in specification, estimation and interpretation	336	(13)
The general vertical market approach	342	(1)
The general equilibrium approach	343	(3)
Practical aspects of multimarket equilibrium welfare analysis	346	(3)
9.6 Conclusions	349	(2)
Appendix to Chapter 9: Welfare measures for multimarket equilibrium	351	(25)
9.A The case of a small vertically structured sector	352	(3)
Consumer surplus in an intermediate market	353	(2)
Producer surplus in an intermediate market	355	(1)
9.B General equilibrium welfare measurement	355	(13)
The equilibrium welfare effects of introducing a single distortion	359	(2)
Equilibrium effects of a distortion in an otherwise distorted economy	361	(4)
The case of an open economy	365	(1)
Segmenting an economy for purposes of practical economic welfare analysis	366	(2)
9.C The Boadway paradox	368	(4)
9.D Empirical considerations	372	(3)
10 The welfare economics of market structure with applications to international trade	375	(42)
10.1 The simple monopoly model	376	(2)
10.2 The simple monopsony model	378	(1)
10.3 The cases of oligopoly and oligopsony	379	(2)
10.4 Demand and cost conditions	381	(1)
10.5 Economies of scale	382	(1)
10.6 Market intermediaries	383	(6)
Producer marketing boards and associations	384	(1)
Consumerism	385	(1)
The pure middleman	386	(1)
An example	386	(3)
10.7 Labor unions	389	(2)
A simple model	389	(1)
Two markets	389	(2)
The effective union	391	(1)
10.8 Antitrust economics	391	(4)
10.9 International trade considerations	395	(10)
Optimal tariffs and export taxes	395	(3)
Supply management	398	(3)
Import—export cartels	401	(4)
10.10 Bargaining, game theory and welfare economics	405	(8)
Bertrand versus Cournot versus Stackelberg behavior	406	(2)
Nash bargaining	408	(3)
Contestable market theory	411	(1)
Game theory as a model of lobbying and political economy	412	(1)
The generality of game theory	412	(1)
10.11 Empirical considerations in markets subject to market power	413	(2)
10.12 Conclusions	415	(2)
11 The welfare economics of information with applications to advertising and information policy	417	(50)
11.1 The role of price expectations	418	(5)
The case of the producer	418	(2)
The case of the consumer	420	(1)
Goods used in combination with durables and physical capital	421	(2)
11.2 The role of quality information	423	(2)
11.3 Measuring the welfare effects of partial and misleading information	425	(8)
Welfare benefits of partial price information	426	(3)
Welfare benefits of partial quality information	429	(1)
Welfare costs of false and misleading quality information	429	(1)
Dependence on the timing of obtaining correct information	430	(2)
Producer technology adoption with errors in productivity perceptions	432	(1)
11.4 An example of government delay in disseminating contamination information	433	(4)
11.5 Apparent versus actual changes in tastes and preferences	437	(2)
True changes in preferences	437	(1)
Apparent changes in preferences	438	(1)
11.6 The welfare effects of advertising	439	(6)
Does advertising change tastes and preferences?	439	(2)
Advertising that disseminates correct information	441	(2)
Advertising with false information	443	(1)
Advertising and fads	444	(1)
11.7 Evaluation of public information policy	445	(4)
Truthfulness in advertising policy	446	(1)
Public price information and market assessment	446	(2)
Public quality information	448	(1)
Public experiment station and extension programs	448	(1)
Timing of information release	449	(1)
11.8 Conclusions	449	(2)
Appendix to Chapter 11: Measuring the welfare effects of quality and information	451	(16)
11.A Concepts of ex ante and ex post welfare measurement	451	(3)
11.B A model of consumer response to information	454	(1)
11.C Welfare effects of correct information and correctly perceived changes in quality	455	(2)
11.D The welfare effects of imperfect information	457	(4)
Correct initial information and incorrect subsequent information	459	(1)
Incorrect initial information and correct subsequent information	460	(1)
Incorrect initial and subsequent information	460	(1)
11.E Empirical considerations in welfare measurement of information effects	461	(5)
The case of perfect information	462	(1)
The case of imperfect information	463	(1)
Effects of disseminating incorrect information	464	(1)
Effects of correcting information	464	(1)
Effects of changing information in a world of imperfect information	465	(1)
11.F Conclusions and potential applications	466	(1)
12 Stochastic welfare economics with applications to agricultural policy analysis	467	(60)
12.1 Consumer welfare with random prices and instantaneous adjustment	467	(2)
12.2 Producer welfare with random but anticipated prices	469	(1)
12.3 Can uncertainty improve welfare?	470	(3)
Extensions to international trade	472	(1)
12.4 Additional considerations regarding welfare effects of price stabilization	473	(11)
Nonlinearity	474	(1)
The form of disturbances	475	(2)
The role of market intermediaries	477	(2)
Response of private storage to public intervention	479	(3)
Dependence of storage costs on buffer stock variability	482	(1)
Dependence of storage costs on time in storage	483	(1)
12.5 Instability with uncertainty	484	(3)
12.6 Welfare measures under risk aversion	487	(12)
Expected utility	488	(1)
Option value as the difference in ex ante and ex post WTP	489	(3)
Aggregation of WTP under risk	492	(2)
Dependence on the specifics of compensation	494	(1)
Which welfare measure is appropriate?	495	(4)
12.7 Market-based estimation of ex ante WTP	499	(5)
12.8 An example	504	(2)
12.9 Agricultural price stabilization	506	(5)
Dependence of who gains on specification	508	(1)
Inability to anticipate favorable demand conditions	509	(1)
Time in storage problems	509	(1)
Risk aversion and supply response to stabilizing prices	510	(1)
Adaptability of policy controls in stochastic circumstances	510	(1)
12.10 Federal crop insurance policy	511	(6)
Moral hazard	512	(1)
Adverse selection	513	(1)
Decomposition of the incentive to participate	513	(2)
Welfare effects of crop insurance	515	(2)
12.11 Conclusions	517	(1)
Appendix to Chapter 12: Producer welfare measurement under risk	518	(9)
12.A Risk aversion and expected utility maximization	518	(1)
12.B Evaluating an expected output price change	519	(2)
12.C Evaluating an expected input price change	521	(2)
12.D Evaluating other changes affecting a risk-averse firm	523	(1)
12.E Stochastic production and state-dependent compensation	524	(2)
12.F Duality and integrability	526	(1)
13 Nonmarket welfare measurement with applications to environmental economic policy	527	(45)
13.1 Externalities	527	(22)
Social optimality	529	(4)
Policies for obtaining social optimality with externalities	533	(4)
Evaluating policies in the presence of distortions	537	(8)
Other issues in comparing policies	545	(4)
13.2 Public goods	549	(4)
13.3 Impure public goods	553	(7)
Excludability, nonrivalry and the case of club goods	554	(2)
Partial excludability and regulation of excludability under nonrivalry	556	(2)
Partial rivalry due to congestion and physical limitations	558	(1)
Quasipublic goods: joint public and private service flows	559	(1)
13.4 Measurement of external environmental benefits and costs	560	(11)
Estimation of producer damage and abatement cost functions	560	(2)
Valuation of consumer nonmarket benefits	562	(2)
Survey techniques and contingent valuation	564	(2)
Travel cost methods	566	(2)
Hedonic models	568	(3)
13.5 Conclusions	571	(1)
14 Intertemporal considerations in cost—benefit analysis with applications to natural resource economics	572	(67)
14.1 The social discount rate	573	(13)
The rationale for social discounting	576	(1)
The market rate of interest as a social discount rate	576	(1)
Theoretical determination of the discount rate: the time preference approach	576	(3)
Practical determination of the discount rate	579	(1)
Net present value versus internal rate of return	580	(5)
Empirical use of discount rates and sensitivity analysis	585	(1)
14.2 Measuring welfare over time: cost—benefit analysis	586	(2)
Accounting for changes in investment	587	(1)
14.3 Intertemporal aspects of the consumer problem	588	(2)
14.4 Intertemporal welfare analysis of risky projects and policies	590	(3)
14.5 Investing in research and development	593	(10)
A basic model of R&D effects	594	(1)
Distributional effects of R&D	594	(2)
Distributional effects in related markets	596	(2)
Open economy considerations	598	(1)
R&D with imperfect competition	599	(1)
Intertemporal evaluation of R&D	600	(1)
Joint public—private investment	601	(2)
14.6 Economic welfare analysis of natural resource policy	603	(9)
Nonrenewable resources	603	(6)
Renewable resources	609	(2)
Capital resources	611	(1)
14.7 A general framework for dynamic and sustainable economic welfare analysis	612	(4)
14.8 Conclusions	616	(2)
Appendix to Chapter 14: Intertemporal welfare analysis with investment in producer capital and consumer durables	618	(22)
14.A Intertemporal economic welfare analysis for producers	618	(11)
Intertemporal optimization	619	(2)
Intertemporal indirect expected utility	621	(1)
Evaluation of welfare effects of expected price changes	622	(1)
Specification of supplies and demands for purposes of estimation	623	(1)
State-dependent compensation for future welfare effects	624	(1)
Specification and estimation of future welfare effects	625	(1)
Welfare effects of changes in present and future risk	626	(3)
14.B Intertemporal economic welfare analysis for consumers	629	(6)
Consumer welfare with investment in consumer durables	629	(3)
Empirical considerations for estimation	632	(1)
State-dependent compensation for future welfare effects	633	(1)
Consumer welfare effects of future price risk	634	(1)
14.C Implications for social discounting	635	(1)
14.D Further generalizations with risk	636	(3)
15 Conclusions and further considerations	639	(11)
15.1 Emphasis on application	640	(2)
Theoretical applications	641	(1)
Empirical applications	641	(1)
15.2 Welfare maximization and cost–benefit analysis	642	(1)
15.3 Income distribution	643	(1)
15.4 Making economic welfare analysis useful in the policy process	643	(6)
Inefficiency of competitive equilibrium	644	(1)
Separation of efficiency and equity	645	(1)
The potential role of welfare economics	646	(1)
Distributional considerations based on public choice theory	647	(1)
Implications for economic welfare analysis	648	(1)
15.5 Summary	649	(1)
Bibliography	650	(23)
Name index	673	(5)
Subject index	678