6 - Adult-equivalence scales, interpersonal comparisons of well-being, and applied welfare economics

Summary

Introduction

Social evaluations in economic environments are often performed with consumer's-surplus tests. For example, one such test employs each household's “willingness to pay” net of costs (Hicksian consumer's surplus) for an economic change, and declares the change worthwhile if and only if the simple sum of these numbers is positive.

If household demand behavior is consistent with a standard indifference map, then a positive willingness to pay indicates an improvement for the household in question, according to household preferences. No account is taken of household members as individuals, however, and, at the aggregate level, no attention is paid to income distribution. Further, these tests do not order social alternatives consistently unless a strong (and implausible) restriction on household preferences is satisfied (Blackorby and Donaldson [1985, 1990]).

In this chapter we investigate adult-equivalence scales and their potential for applied welfare economics. These scales permit comparisons of levels of well-being between people who are members of different households, and the social-evaluation procedure described uses these comparisons to perform consistent social evaluations that:

1. Deal with the general equilibrium problem (price change).

2. Explicitly model the fact that economic behavior rests on household decisions while individual household members experience well-being or utility.

3. Take account of economies of scale in household consumption.

4. Base social evaluations on individual (rather than “household”) well-being.

5. Take account of inequality of well-being and therefore of incomes.