UK Net Domestic Consumer Surplus (1700-2020), Inequality and the Environment

GDP per capita has been the primary proxy of welfare and wellbeing across the world for several decades. GDP captures the value of goods and services produced. But how much do consumers actually benefit from what they consume?

Generally, consumers value what they purchase at least as much as the prices they are paying for goods and services, otherwise they would not make the purchase. How much beyond the market prices do consumers value these goods? This concept of net benefit from consumption is called consumer surplus.

The proposed research aims to provide the first estimates of consumer surplus called NDCS (Net Domestic Consumer Surplus) and its historical evolution for an entire economy, the UK from 1700-2020, combining detailed consumer expenditure and price data with demand modelling and econometric methods from causal inference. Our first central research question is: how much consumer surplus does the UK economy generate with its produced (and net imported) goods and how has this evolved over the past decades and centuries?

Recognising that the UK economy has experienced a number of shocks, we also explore the impact of major structural transformation, such as the digital age, and events like major recessions or pandemics on consumer surplus.

The research project will also shed light on two important challenges discussed throughout academia, policy circles and the general public alike: inequality and climate change. Consumers from different income groups purchase different baskets of goods - for example lower income consumers tend to spend relatively more on food than higher income consumers.

We therefore estimate how NDCS varies across income groups, which allows us to answer our second central research question: How much inequality is there in consumer surplus, and has inequality increased or decreased over time?

Finally, we want to compare the estimated benefits from consumption with the environmental costs associated with consumption, focussing on carbon emissions. This allows us to answer our third central research question: How does consumer surplus compare with environmental costs from carbon emissions. Since a key policy instrument to curb carbon emissions is the introduction of carbon taxes, we also ask: What would be the impact of carbon pricing on consumer surplus in the UK, and the distribution of consumer surplus across income groups?

The proposed research will benefit (i) academic researchers in the relevant field through dissemination of findings and making output, code and methodology available for replication and extension, (ii) policy makers and stakeholders through engagement and consultation throughout the project, and (iii) the general public, given that part of the output is an easily accessible indicator of general interest and relevant for topics discussed widely throughout society, such as inequality and climate change.