Question

In: Economics

The change in welfare resulting from changes in environmental quality can be converted into monetary units....

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

Solutions

Expert Solution

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


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