Giovanni Facchini, Peter J. Hammond and Hiroyuki Nakata -- Spurious Deadweight Gains

Click to view a PDF (Adobe Acrobat PDF) file.

Abstract

July 2000

Marshallian consumer surplus (MCS) is generally an inaccurate measure of welfare change because it neglects income effects. Suppose these effects overturn the usual demand response to a price change. Then, the deadweight loss from a distortionary tax or subsidy has the wrong sign, that is, there is a spurious deadweight gain.

JEL Classification: D11, D6. Keywords: Marshallian consumer surplus, Giffen goods, Stability of equilibrium