5.1 Uncompensated Consumer Welfare

Economists and policymakers want to know by how much a shock that affects the equilibrium price and quantity of goods and services helps or hurts consumers. Examples of such shocks include price changes when new inventions reduce costs or when a government imposes a tax or subsidy, and quantity changes when a government sets a quota. To determine how these changes affect consumers, we need a measure of consumers’ welfare.

If we knew a consumer’s utility function, we could directly answer the question of how government actions, natural disasters, and other events affect consumers’ welfare. If the price of beef increases, the budget line of someone who eats beef rotates inward, so the consumer is on a lower indifference ...

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