The elevated status of the elasticity of marginal utility of consumption

Abstract

The latest UK Treasury guidance on appraisal and evaluation in central government raises the status of the elasticity of marginal utility of consumption (e). While estimates of e are sensitive to a measurement approach, a case is made for placing some emphasis on a method based on consumer demand analysis. Alternative demand models are estimated for the UK and from the best results an e value of 1.6 emerges. For EU countries both this and other methods can be used to measure e. This, for example, permits a cross-country comparison of alternative measures of the social discount rate on a methodologically consistent basis.

Notes

¹ Inspection of the AIDS model formula for the income elasticity of demand (see Appendix A) makes it clear that large changes in the budget share of food (SF) must have a substantial impact on the measured value of the elasticity. In fact, SF fell from around 22% in 1965 to less than 10% by 2001.

² Independent evidence from ‘The National Food Survey’ suggests that the income elasticity of demand for ‘all foods’ has remained broadly constant over the period 1979–2000. The evidence is based on very large samples of household data taken over 3 year periods on a rolling basis––i.e. 1979–1981, 1980–1982, 1981–1983, etc to 1998–2000. (See MAFF, 2000, pp. 97–8.) This survey has recently been combined with the Family Expenditure Survey and re-named ‘The Expenditure and Food Survey’.