Daniel McFadden

Welfare Economics at the Extensive Margin

Friday, 3 September 2004
09:30 - 10:00 hrs CEST


Applied welfare economics is greatly facilitated when the preference field of consumers can be restricted so that compensating and equivalent variations have computationally tractable forms that can be estimated from market data. The leading class of preferences of this type is the Gorman polar form, particularly with parallel Engle curve restrictions that permit aggregation of preferences into a community preference field. This paper reviews the origins and properties of the Gorman polar form, and its use in welfare economics, and explores the extension of this form to problems of consumer choice in hedonic or physical space. An assumption that Engle curves are parallel across locations leads to simplifications in the description of demand and the welfare calculus that use locationally representative Gorman consumers. The paper considers two applications. The first compares the deadweight losses from Ramsey regulation and self-regulation of an industry with Cournot retailers that utilize a common network resource such as a transportation or communication network. The second analyzes consumers willingness-topay to remediate an environmental hazard that has a spatial distribution around a point source, or to evaluate the spatial welfare effects of a transportation network improvement. The applications illustrate the usefulness of welfare analysis employing Gorman preference fields that are given sufficient latitude so that they approximate the true consumer preference field.

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