compensating variation

Definitions

Economics

  • noun the amount of extra money needed to give a customer the same utility as if the price of the good or service were to rise; the opposite, ‘equivalent variation’, is the extra money needed to give the customer the same utility as if the price were to fall

Health Economics

  • (written as Compensating Variation)
    The compensating variation in income is the minimum amount of money that has to be given to an individual after a price rise to make them as well off in their own judgment as they were before the change. Similarly, in the case of a price fall, it is the maximum amount of money the individual would be willing to pay after the change that would leave them as well off as they were before the change. It is a measure of welfare change introduced by Sir John Hicks (1904-89) and its main use lies in cost-benefit analysis and related techniques for estimating the benefits of public investments.
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