FUNCTIONAL FORMS, EXOGENOUS SHIFTS, AND ECONOMIC SURPLUS CHANGES

Conditions for exact welfare measures in equilibrium displacement mode ling are examined. These relate to the functional form of supply and d emand, the nature of the exogenous shift, and the definition of percen tage changes. Approximation errors when these conditions are not met i n empirical applications are investigated and analytical expressions f or the errors derived. Significant errors are possible when a proporti onal shift is assumed. The assumptions underlying Alston and Wohlgenan t's empirical findings are identified. The restriction that supply mus t be elastic is shown to be unnecessary.