Separability, partial demand systems, and consumer's surplus measures (original) (raw)

In practice. complete demand systems are not estimated. Rather, either an incomplete demand system is estimated, or separability is invoked and a partial demand system is estimated. This paper considers the relationship between the conventional compensating variation (equivalent variation) and the corresponding welfare measure that can be derived from a partial demand system and the current budget allocation to the separable group. Even assuming the separability assumption invoked is appropriate, these partial measures provide. in general, only a limited amount of information about the compensating variation and no information about the equivalent variation. Great care is therefore needed when using partial welfare measures to evaluate policy.