Equivalent variation

The equivalent variation measures the utility in monetary units . So it translates the preference of a household into monetary units. In other words: It describes the amount of money that a household is willing to pay or that would have to be given to it so that it can realize the new level of utility at constant prices . ${\displaystyle u^{1}}$ ${\displaystyle p^{0}}$

The concept of equivalent variation is used in finance , for example , to measure the so-called excess burden, the additional burden of taxation.

Mathematically and economically, the concept is based on the solution of the cost minimization problem of the household. The Hicksian demand function is integrated and obtained ceteris paribus the overall benefit of the household between two prices while holding the constant utility level, ie the area of the benefits translated into monetary units.

${\displaystyle EV=e(p^{0},u^{1})-e(p^{0},u^{0})}$

With:

e (•): expense function

${\displaystyle p^{i}}$: Price vector in period i

${\displaystyle u^{i}}$: Benefit level in period i

The equivalent variation results from the considerations on the Slutsky decomposition , but in contrast to the compensating variation describes a different methodological concept.

literature

• Hal R. Varian : Microeconomics . Oldenbourg; Edition: 3rd, completely revised. u. strong adult Edition (January 1994) ISBN 3-486-24483-3