| We are concerned here with the problem of measuring consumer surplus from ordinary demand functions, in those situations where changes in the budget lead to variations in utility that are not monotonic.;The first problem considered is the integrability question: the conditions which guarantee that the demand functions can be integrated to yield the generating utility function.;The problem of obtaining a valid surplus measure that is consistent with consumer preferences is considered.;In most practical applications of welfare analysis, use is made of the Marshallian surplus, on the grounds that it varies only slightly along alternate paths, and along any particular path, will provide a good approximation to the Hicksian variations. While this is true for monotonic paths, we show that it is not so for paths that lead to nonmonotonic utility changes.;We will show that many of the problems that arise for nonmonotonic paths either do not exist, or are insignificant when consumer surplus is measured for monotonic paths.;Such approximations are not necessary, as the equivalent variation can be calculated directly from ordinary demand functions. When preferences are quasihomothetic, expansion paths are linear, which allows us to calculate the integrating factor, and hence the indirect utility function. In the more general case, compensated changes in income are considered for the budget path, which gives us the expenditure function corresponding to the final utility level. This approach involves solving a differential equation. Closed form solutions as well as the method of numerical integration are considered.;As an example of paths that lead to nonmonotonic changes in utility, we consider the effects of a move to time differentiated electricity rates on the welfare of the consumer. (Abstract shortened by UMI.). |
