Efficiency and Distribution

In defining benefits in terms of willingness to pay, and costs in terms of compensation, no allowance is made for the possibility that the marginal utility of income will differ from person to person. Although Marshall assumed constant marginal utility of income with respect to price changes, he was convinced that marginal utility of any good was less to a rich person than it was to a poor person. 1 Applying the Marshallian principle would therefore mean weighting each benefit and cost by the respective recipient’s marginal utility of income. The obvious problem is that of measuring the latter entity.