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Compensating variation

The amount of additional income needed to restore an individual’s original level of utility following a change in the economic environment. For example, the change in the economic environment can be an increase in the price of a good, or the provision of a local park. In the first case compensating variation will be positive and in the second case the compensating variation will be negative (assuming the consumer enjoys the good and the park).

Compensating variation

Reference: Oxford Press Dictonary of Economics, 5th edt.