| Summary: | World Bank Discussion Paper No. 273. This paper discusses the problems of measuring welfare changes caused by large price increases or decreases in the power sector--for example, when tariffs are raised to cover long-term costs or when electrification displaces more expensive alternatives. Traditional methods of measuring welfare changes have centered on the use of the "consumer surplus" as an indicator. But the accuracy rate of this method is high only when income elasticities are low and when relatively small price changes are analyzed. Because the demand for electricity has very high income elasticities in developing countries--which is where very large price shifts usually occur--the paper argues that the consumer surplus can be an unreliable form of measuring the welfare impacts of these price changes. The author provides alternative methods of measurement, showing how the compensating or equivalent variations in income can be calculated whenever the demand curve is available.
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