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Edited by Jeroen C.J.M. van den Bergh
Chapter 51: Theory of Economic Valuation of Environmental Goods and Services
Per- Olov Johansson 1. Ordinary and compensated money measures The literature that deals with the theory and measurement of the consumer’s surplus is both large and growing. The concept of consumer surplus was first introducted by Dupuit ([18441 1933), who was concerned with the benefits and costs of constructing a bridge. Marshall (1920) introduced the concept to the English-speaking world. As a measure of consumer surplus, Marshall used the area under the demand curve less actual money expenditure on the good. At least this is a common interpretation. Marshall’s measure, like that of Dupuit, was an all-or-nothing measure: ‘The excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay is the economic measure of this surplus of satisfaction’ (Marshall, 1920, p. 124). Adding to this amount actual money expenditure on the good yields the total wilhgness to pay (WTP) for a particular quantity of the good. Measuring the consumer surplus as an area to the left of an ordinary or Marshallian demand curve yields what is known as the ordinary or uncompensated or Marshallian consumer surplus. Later Hicks (I 940/4 1) and Henderson (1940/41) demonstrated that consumer surplus could be interpreted in terms of amounts of money that must be given tohaken from an individual. The Hicksian or income-compensated consumer surplus is measured as an area to the left of a compensated or Hicksian demand curve where the individual, through adjustments in his income, is held...
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