L6ImpactofChanges - Introductionto Microeconomics Lecture6...

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1 Introduction to Microeconomics Lecture 6 Measuring the Impact of Changes Ian Crawford Outline z Often in applied work (esp. policy evaluation) we want to know the effects which price changes have on consumers’ welfare. z E.g. Indirect tax reform, tariffs, climate change levy, inflation ... z Will consumers be better/worse off on average; who are winners/losers? How do we measure the gains/losses? Health Warning! z We have stressed that utility representations of preferences are ordinal. z When prices change and the consumer re optimises we can say whether they are better off or worse off or the same. z But if we want to ask “how much better off are they?” and compare the answer across consumers we are entering the somewhat murky world of util counting. Plan z Theory: Measuring economic welfare. z Compensating and Equivalent Variation z Cost of Living Indices z Practice: Measurement and approximations z Consumer surplus
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