Research note: An Overview of the Traditional Discussion on Methodology of Quantitative Measurement of Economic Welfare

Abstract

Degree of consumer satisfaction and economic welfare may fall under the category of subjective consumer psychology, and there is no way for a third party to directly observe or measure them quantitatively. Discussions about quantitative methodology of measuring changes in economic welfare using monetary scales have been going on for a long time. One of the representative examples is Dupuis and Marshall’s consumer surplus. As for the theory of consumer surplus, significant operability has been pointed out as an advantage, as consumer surplus can be easily estimated directly from actual market data. On the other hand, these arguments faced many criticisms from a pure theoretical perspective. Later, as an alternative to consumer surplus, the concepts of Compensating Variation (CV) and Equivalent Variation (EV) were proposed by Sir John Richard Hicks. Although Hicksian CV and EV are said to have higher theoretical qualifications than Marshallian consumer surplus, they are based on Hicksian demand function, which is difficult to measure from actual market data. Therefore, it has been pointed out that it is seriously lacking in operability. This paper provides an overview of the traditional debate surrounding the quantitative methodology of the measurement of economic welfare.