Household welfare measurement and the pricing of basic services

Employing total consumption as a household-level welfare indicator with which to measure poverty has often been criticized because it is felt that such an indicator does not account for differing access to, and cost of, publicly provided services. This paper discusses when and how adjustments can be made to expenditures derived from household surveys so as to reflect the consumption of basic services. Markets which are subsidized, rationed and subject to increasing marginal tariff pricing are examined and simple adjustment methods are discussed. Using Ecuador to illustrate the methods, the paper shows that incorporating adjustments in markets for basic services can significantly alter poverty estimates. Including such adjustments into a comprehensive measure of welfare can therefore be important and can also contribute to the wider acceptance and use of consumption as a welfare indicator guiding public policy development.