Introduction

The best-known measures of welfare changes are the compensating and equivalent variations of Hicks. For a single individual they have the advantage of being monetary measures of welfare change that are also exact. That is, if a positive compensating variation is associated with a project, this indicates that the consumer's utility has gone up because of it. Because these measures are in monetary terms there is a natural temptation to sum them in order to evaluate potential projects. Unfortunately, Boadway (1974) showed that, in a competitive economy, the sum of compensating variations is always nonnegative (positive if prices change) for all possible projects, rendering it an inappropriate tool for project analysis. Roberts (1980), and later Blackorby and Donaldson (1985) extended this result by demonstrating that knowledge of all compensating variations associated with various projects could only be used in Pareto-consistent fashion in rare circumstances even if all consumers face the same prices – a representative consumer would have to exist – and never if consumers face individual prices. The limited usefulness of these surpluses has led more recently to the use of another monetary measure of utility: the equivalent income function. This is the minimum expenditure needed to bring a consumer to a given level of utility at some pre-specified reference prices. Having computed these equivalent income functions, a planner can analyse the worthiness of a project by means of a social welfare function defined on them; see, for example, King (1983a).