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Exact welfare measurement for double-log demand with partial adjustment

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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%.

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Authors and Affiliations

  1. Energy and Environmental Economics, Inc., 101 Montgomery Street, Suite 1600, San Francisco, CA, 94104, USA

    C. K. Woo & E. Kollman

  2. Hong Kong Energy Studies Centre, Hong Kong Baptist University, Kowloon, Hong Kong

    C. K. Woo

  3. Frontier Associates LLC, 1515 S. Capital of Texas Highway, Suite 110, Austin, TX, 78746, USA

    J. Zarnikau

  4. LBJ School of Public Affairs and Division of Statistics, The University of Texas at Austin, Austin, TX, 78713, USA

    J. Zarnikau

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  1. C. K. Woo
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  2. J. Zarnikau
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  3. E. Kollman
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Correspondence to J. Zarnikau.

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Woo, C.K., Zarnikau, J. & Kollman, E. Exact welfare measurement for double-log demand with partial adjustment. Empir Econ 42, 171–180 (2012). https://doi.org/10.1007/s00181-010-0416-1

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  • DOI: https://doi.org/10.1007/s00181-010-0416-1

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