COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

Lux et veritas

COWLES FOUNDATION DISCUSSION PAPER NO. 1507

The Nonparametric Approach to Applied Welfare Analysis

Donald J. Brown and Caterina Calsamiglia

April 2005

Changes in total surplus and deadweight loss are traditional measures of economic welfare. We propose necessary and sufficient conditions for rationalizing consumer demand data with a quasilinear utility function. Under these conditions, consumer surplus is a valid measure of consumer welfare. For nonmarketed goods, we propose necessary and sufficient conditions on market data for efficient production , i.e., production at minimum cost. Under these conditions we derive a cost function for the nonmarketed good, where producer surplus is the area above the marginal cost curve.

Keywords: Welfare economics, Quasilinear utilities, Nonmarketed goods, Afriat inequalities

JEL Classification: D11, D12, D21, D60