Equivalent variation

The equivalent variation measures the benefits in monetary units. So you translated the preference of a household in monetary units. In other words, it describes the amount of money that is willing to pay a household or which would be given to him so that he can realize the new level of utility at constant prices.

The concept of equivalent variation is used for example in finance to measure the so-called excess burden, the additional burden of taxation.

Mathematics and economically, the concept is based on the solution of the cost minimization problem of the household. The Hicksian demand function is integrated and one obtains, ceteris paribus, the overall benefit of the household between two prices article held constant utility level, ie the area of benefits translated into monetary units.

With:

The equivalent variation is due to the reflection on the Slutsky decomposition, however, describes in contrast to the compensating variation, a different methodological approach.