Does an Increase in the Price of a Necessity Reduce Welfare More than an Equivalent Increase in the Price of a Luxury?

by Joseph P. Newhouse

Purchase Print Copy

 FormatList Price Price
Add to Cart Paperback8 pages $20.00 $16.00 20% Web Discount

This paper develops an argument to suggest that the price increase that causes the greater decrease in welfare is independent of which good is a "necessity," if necessity is interpreted as low-income or low-price elasticity. A simple two-commodity model expresses utility as a function of medical care and a composite bundle of other goods. Conclusions that hold for the model are assumed to apply to a multicommodity world. An illustration shows the proportion of a city worker's family budget for a moderate living standard allocated to various commodities in 1966. According to this index, shelter, food, and medical care price increases cause a noticeably greater decrease in welfare than other commodity groups. Thus, there may be some reason for concern over recent behavior of medical care prices, but the reason is not that medical care is a "necessity." 8 pp.

This report is part of the RAND Corporation paper series. The paper was a product of the RAND Corporation from 1948 to 2003 that captured speeches, memorials, and derivative research, usually prepared on authors' own time and meant to be the scholarly or scientific contribution of individual authors to their professional fields. Papers were less formal than reports and did not require rigorous peer review.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.