Welfare measures from discrete choice models in the presence of income effect.

Welfare evaluation is central to the appraisal of transportation projectsand many countries rely on a formal calculation procedure to obtain consumer surplus change, often as an input to a more general cost benefit analysis. In calculating consumer surplus change, it is attractive to use measures that are consistent with the demand model being used. When this model is of the logit form, the logsum measure is a natural candidate as a measure of consumer surplus change. In this context, demand models are seen as predicting a continuous variation in demand as being derived from discretechoice models by estimating expected demand from an aggregation of choiceprobabilities. However the logsum and analogous measures are essentially Marshallian in their concept and in fact are incorrect when the policy being evaluated has an impact that is not negligible with respect to the incomes of the persons travelling. Such circumstances certainly arise in many applications for developing countries, but are also relevant in developed countries when policies that would change car ownership or implement extensive road pricing are being considered. Besides the review of the theoretical and practical issues involved in deriving income-compensated welfare measures from discrete choice models, and the discussion on welfare measures from more general random utility models, the paper will also present newresults on the relevant methods from runs using an operational transport model, in this case the Dutch national model system LMS. It is argued thatit is important to make methods available for making welfare analyses consistent with the latest advances in choice modelling. Inconsistency between these stages of analysis is unacceptable because of its implications forthe appraisal of projects, but it is not always an easy task to maintain the same assumptions about utility functions and the distribution of preferences in the population. A literature study indicated that different approaches can indeed lead to different results which could affect the fundingof important projects. For the covering abstract see ITRD E145999