Article

Empirical Economics

, Volume 42, Issue 1, pp 171-180

Exact welfare measurement for double-log demand with partial adjustment

  • C. K. WooAffiliated withEnergy and Environmental Economics, Inc.Hong Kong Energy Studies Centre, Hong Kong Baptist University
  • , J. ZarnikauAffiliated withFrontier Associates LLCLBJ School of Public Affairs and Division of Statistics, The University of Texas at Austin Email author 
  • , E. KollmanAffiliated withEnergy and Environmental Economics, Inc.

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Abstract

This paper demonstrates that a double-log demand with partial adjustment (DLPA) is consistent with the theory of consumer utility maximization. It offers an approach for calculating the compensating variation (CV), the exact welfare effect of a change in a price series when a DLPA is employed. Significant bias may result if the CV is based on a static double-log demand when a DLPA function is appropriate. We revisit a recent study of demand for gasoline in the U.S., finding that the CV based on the static double-log would overstate the welfare effect of a 6-month temporary gasoline tax by 7.5%.

Keywords

Double-log demand Welfare measures Consumer surplus Compensating variation

JEL Classification

D60 Q48 C53 C22