ABSTRACT

Following the Hicksian definition of consumer surplus (Hicks, 1939), we must recognize that, in general, there can be two useful ways of valuing a good or bad. First, there is a compensating variation (CV), which measures the largest sum a person is willing to pay for a good. Then there is what Hicks called an equivalent variation (EV), which measures the smallest sum a person will accept to forego a good. And it transpires that the so-called EV measure is, in fact, no more than the CV measure for the reverse movement. To be more precise, it is so for what is sometimes called a normal good one of which more is bought when the individual's real income, or more generally his welfare, is increased. It is also an understatement of the minimum sum required to compensate them if that price is no longer available.