Introduction

The basic objective of applied welfare economics is to determine if the introduction of a specific project or economic policy will make an individual or group of consumers better off or worse off than will the available alternatives, including the status quo. The tasks involved are the same, whether we are concerned with evaluating the consequences of some policy that affects the entire economy (e.g., a variation in the level of tariffs on imports) or the effects of a project involving only a small community (e.g., the construction of a road that bypasses a congested urban center). In both instances a procedure is required that will enable the economist to work with observable data about consumer preferences, as revealed in the associated demand functions, in order to draw inferences about how the consumer is affected by changes in relative prices and/or income. The objective of this book is to explain the steps required to utilize such information so as to create an operational welfare measure.

This problem has taxed economists now for over a century. At the microeconomic level of project evaluation, the concept of consumer surplus, based on the area beneath a consumer demand curve, continues to attract widespread interest. At the macroeconomic level, many types of index numbers have been formulated and classified. Yet current thinking hardly yields hopeful conclusions. Many economists deny that it is possible to construct an applied welfare indicator at all.