Economic welfare evaluation in an era of rapid technological change

Abstract

In an era of rapid technological change, from the perspective of welfare measurement a case can be made for modifying currently popular consumer demand systems. The case is based on the importance of the income effect. In particular it is important to avoid a problematic characteristic of some popular demand systems which we term effective homotheticity. This characteristic compromises the ability of counterfactual analyses to distinguish different sized welfare effects at different income levels. The paper proposes an appropriate modification to two popular demand systems and derives the implied welfare evaluation formula required for counterfactual analysis of non-homothetic income effects.