Errors in the Numerical Assessment of the Benefits of Price Stabilization

This paper presents a simple computational procedure for determining a consumer's willingness to pay to have a price stabilization policy implemented. Numerical simulations are then provided which demonstrate that the commonly used expected surplus measures (whether Hicksian or Marshallian) can in fact seriously misstate the true benefits of price stabilization. These simulations also illustrate the extent to which the results may be dependent upon the assumptions made-implicitly or explicitly-regarding the consumer's attitudes toward risk, thereby underscoring the need to conduct sensitivity analyses to determine the robustness of cost-benefit assessments with respect to these assumptions. Key words: compensating variation, consumer's surplus, price stabilization, welfare. In evaluating the effect of price stabilization on the consumer, expected value of consum-er's surplus has become a common welfare measure. This approach, which was originated by Waugh, has been followed by many au-thors, including Bradford and Kelejian; Burt