Presentation on theme: "Monetary Measures of Utility How much is a gallon of gas worth to a person? Expenditure at going price (“value in exchange”) Value above price/expenditure?"— Presentation transcript:
Monetary Measures of Utility How much is a gallon of gas worth to a person? Expenditure at going price (“value in exchange”) Value above price/expenditure? Suppose you can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market. Q: What is the most you would pay to enter the market? Q: How would you depict this graphically? Q: How could you depict this value and the consumer expenditure on a demand graph?
Consumer’s Surplus (with competitive supply) p1p1 CS = ½* q m ( p max - p m ) Expenditure= q m * p market “Value in Use” = E + CS = “Impact Study” MC = Supply
Tax Revenue Benefit-Cost Analysis (output units) qmqm q1q1 Policy Change: Excise tax imposed of $t pmpm p1p1 t CS Deadweight Loss = ½ *(p1-pm)*(qm-q1) Seller Revenue Marginal Cost
Benefit-Cost Analysis (output units) q m2 Expenditure of tax revenues in Market 2 p m2 p2p2 t Added CS + Expenditure = P m2 (q 2 -q m2 ) + ½ p 2 (q 2 -q m ) MC q2q2
General Equilibrium CBA Preceding graphic provides measure of welfare loss in single market Total effect takes into account gain in welfare from expenditure of funds in new market(s) Net Welfare Change in $ = ½ *(p1-pm)*(qm-q1) – P2m(q2-qm2) ½ p2*(q2 – qm2)
Compensating Variation and Equivalent Variation Two additional dollar measures of the total utility change caused by a price change are Compensating Variation: the least income that, at the new prices, just restores the consumer’s original utility level? Equivalent Variation: the least income that, at the old prices, just restores consumer’s utility level