This book develops economic welfare theory in the context of application to public policy
questions. The authors’ view is that knowledge of applied welfare theory is essential to
the provision of useful and appropriate policy information.Moreover, empirical work by
applied economists must be guided by the considerations of economic theory as well as
the empirical possibilities suggested by econometric theory and data availability. This
book provides a thorough review of economic welfare theory and illustrates how this
theory can be employed to obtain policy and project evaluation information in the areas
of international trade, the economics of technological change, agricultural economics,
and environmental and natural resource economics, just to name a few.
The general equilibrium presentation of welfare theory emphasizes the shortcomings
of the Pareto criterion as a guide to policy analysis and policy decisions. The compensa-
tion criterion, or Potential Pareto Improvement Criterion, of Kaldor and Hicks is then
considered as a more promising approach to making public policy decisions. The com-
pensation criterion is found to fall short of providing guidance to determine the optimum
optimorium for society but is found to be useful in terms of identifying potential improve-
ments in the economic well-being of society. The need for a social welfare function to
enable an economist to make statements about what ought to be done in any given situa-
tion is clearly illustrated.
The emphasis of this book is on providing quantitative information on the welfare
effects of alternative policy measures. After providing justification, it builds on the
willingness-to-pay (WTP) measures proposed by Professor Hicks as the foundation for
applied welfare economics and cost–benefit analysis. The problems that one confronts
when attempting to use consumer surplus as a measure of welfare gain for the individual
or household with single and multiple price changes are discussed verbally and explained
graphically. Almost all chapters are followed by mathematical appendices that rigorously
establish the results discussed in the chapters.Willingness-to-pay measures are developed
for  firms and households where households are viewed as both consumers and
owners/sellers of resources.
In each case, the foremost concern is potential for applications to practical policy prob-
lems. In each case, possibilities are presented and discussed for (1) using consumer surplus
as an approximation for WTP measures, (2) measuring WTP exactly (aside from econo-
metric error) using existing econometric studies and (3) using duality theory to specify
equations consistent with theory and then obtaining exact WTP measures following esti-
mation (again aside from econometric error).
The welfare measures for individual agents are then aggregated to provide market mea-
sures of welfare gain and loss that satisfy the compensation criterion.Approaches are sug-
gested to deal with the heterogeneity of firms and consumers based on practical data
availability, which provide a way of overcoming the traditional shortcomings of repre-
sentative producer or representative consumer models to the extent that data are available.
The relationship between the compensating and equivalent variation measures of
Professor Hicks and the compensation criterion is explained in detail. A number of issues
in applied welfare economics are treated at the market level in this book. For example,
considerable emphasis is placed on the possibility of measuring welfare effects on con-
sumers and producers in horizontally and vertically related markets to the market in
which a policy change occurs. Also, the possibility of disaggregation of welfare effects for
purposes of analyzing distributional issues and implications of policy decisions is inves-
tigated in detail. Some econometric considerations which arise in multimarket welfare
analysis are also discussed, and suggestions are made with regard to the choice of market
in which to do empirical analysis when data are sufficient to provide a choice. The condi-
tions under which one should choose to estimate partial (or ordinary) rather than equi-
librium demand and supply curves are spelled out.
Some of the later chapters cover specific areas of application and emphasize problems
associated with welfare measurement when competition fails, welfare measurement under
uncertainty, the welfare economics of information, nonmarket welfare measurement,
dynamic issues and the welfare economics of extractive natural resources, and choice of
the social rate of discount.
This book is designed to be highly flexible from the user’s standpoint. The chapters are
written at a level which is accessible to the upper division students in economics and
related fields. The bulk of the analysis in the chapters is graphical, with simple algebra
where necessary. Heuristic proofs are provided for major results whenever possible. For
use as a graduate level text, full mathematical details and justification are provided in
appendices and footnotes. The appendices rigorously establish the results found in the
general text of the corresponding chapters and in some cases go beyond material dis-
cussed in the chapters. The proofs follow modern approaches utilizing the concepts of
duality and the envelope theorem. The only mathematical tools necessarily required even
for the appendices, however, are differential and integral calculus.
The topics covered by this book form a useful reference for practitioners of applied
welfare economics. Government economists and engineers who are charged with provid-
ing cost effectiveness studies and with doing benefit–cost analysis will benefit by follow-
ing the principles developed in this book for multimarket analysis, multiprice change
analysis, and intertemporal or dynamic analysis both with and without uncertainty and
risk. Natural resource economists will find Chapter 14, which deals with the economics
of extractive resources, unique in that it treats the theory of intertemporal optimization
in a manner understandable to students who have had only intermediate economic theory.
This book represents an expansion of an earlier book by the authors, Applied Welfare
Economics and Public Policy (Just, Hueth and Schmitz 1982). That book, which has been
used for many years as both a reference book and the text of numerous university courses
across the USA and around the world, was awarded the Publication of Enduring Quality
Award by the American Agricultural Economics Association in 1994. That book grew out
of a course taught by Professor Andrew Schmitz at the University of California at
Berkeley in the spring of 1970. The other two authors of this book were students in that
course. It was there that their interest in applied welfare economics was sparked. Professor
Schmitz, with two other students of a previous class, Martin Currie and John Murphy,
had just published in the Economic Journal what subsequently became a classic survey of
consumer surplus (Currie, Murphy and Schmitz 1971). In the process of the preparation