The welfare interpretation of consumer equivalence scales

Abstract

A consumer equivalence scale is a price index that shows the relative household expenditures required in households of different sizes so as to reach some common living standard. These scales typically increase with the number of people in the household, that at less than a per-capita rate due to the existence of joint consumption within the household (and the lower needs of children). <P> However, if household composition is considered as a matter of choice rather than exogenously given, then a revealed preference argument suggests that such a welfare interpretation of equivalence scales is meaningless. Consumer equivalence scales measure the cost of children (or other household living arrangements) but not their benefits. Since many people choose to have children, these costs must be outweighed by other benefits. <P> This paper considers these issues of demographic choice and explores the relevance of equivalence scales to the broader welfare questions associated with tax/transfer policies and poverty and inequality measurement. The paper concludes that in contrast to conventional methods of measure poverty and inequality, there is a case for the use of different equivalence scales for adults and children in the same household. Though the adults may have chosen their lower living standard in exchange for the ‘joys of parenthood’, the children have made no such choice. Show more