This paper demonstrates that a double-log demand with partial adjustment (DLPA) is consistent with the theory of consumer utility maximization. It offers an approach for calculating the compensating variation (CV), the exact welfare effect of a change in a price series when a DLPA is employed. Significant bias may result if the CV is based on a static double-log demand when a DLPA function is appropriate. We revisit a recent study of demand for gasoline in the U. S., finding that the CV based on the static double-log would overstate the welfare effect of a 6-month temporary gasoline tax by 7.5%. Copyright © 2010 Springer-Verlag.
CitationWoo, C. K., Zarnikau, J., & Kollman, E. (2012). Exact welfare measurement for double-log demand with partial adjustment. Empirical Economics, 42(1), 171-180. doi: 10.1007/s00181-010-0416-1
- Double-log demand
- Welfare measures
- Consumer surplus
- Compensating variation