Specifically, using compensating variation is only theoretically correct if consumers have homothetic preferences (i.e., the slopes of all indifferent curves are constant along any ray from the origin), which implies that each good in a consumer’s utility function has an income elasticity of one. Equivalent variation does not require a similarly restrictive assumption. See George W. McKenzie, Measuring Economic Welfare: New Methods (New York, NY: Cambridge University Press, 1983). Also see Marco Becht, “The Theory and Estimation of Individual and Social Welfare Measures.” Journal of Economic Surveys, 9(1), 1995, 53–87; and the references therein. Although equivalent variation is an appropriate measure of the welfare change resulting from a price increase or decrease, it has been argued that either compensating surplus or equivalent surplus is more appropriately used when the quantity of a good, rather than its price, increases or decreases. In this appendix, we focus on price rather than quantity changes. For a discussion of when each of the welfare change measures is most appropriately used, as well as a useful graphical presentation of each, see V. Kerry Smith and William H. Desvousges, Measuring Water Quality Benefits (Boston, MA: Kluwer-Nijhoff Publishing, 1986), chapter 2.