In: Economics
The change in welfare resulting from changes in environmental
quality can be converted into monetary units.
1 Compensating Variation
2 Equivalent Variation
3 Compensating Surplus
4 Equivalent Surplus
5 Consumer Surplus
Explain and compare
Consumer surplus is the additional benefit a customer gains from what he is willing to pay and what he actually pays, this is the monetary gain the Consumer gets.
Compensation variation is the change needed to buy an utility
due to change in price or change in quality of the product. Here
the Consumer needs to add money.
Equivalent variation is the benefit in income that changes a
Consumer's utility to a level that occurred if it happened.
Similarly compensating surplus is the additional benefit
gained.
Fig1. Here if the price increases we can see a shift from A1 to A2
that shows the equivalent variation and the utility curve also
shifts to adjust the variation.
Fig 2. Here the utility increase from u to u1 shows the
compensation surplus and equivalent surplus that is beneficial to
the consumer by changes in environment. This gives a Consumer
surplus also to the consumer