Expected consumer's surplus as an approximate welfare measure (Q2460227)

The author replies on a natural question how well the change in expected consumer's surplus (ECS) approximates the willingness to pay when consumers are risk averse and income affects demand. In contrast to the case of nonrandom prices the percentage error from using the change in ECS to approximate the willingness to pay for a change in the distribution of a random price is unbounded. If the change is smooth on the space of random variables, and either the initial price is nonrandom or state-contingent payments are possible, then the change in ECS locally approximates the willingness to pay well. The paper shows that this condition fails in some important applications.