Slutsky equation

Recently, Nyman7 took a fresh look at the traditional approach presented in Figures 7.1 and 7.2, which dates back to Pauly.8 Nyman argues that Pauly overestimated the welfare loss attributable to insurance, because he unduly included the income effect on consumption, whereas it should have been subtracted to leave the price effect. The income effect to be subtracted is due to the income transfer from the healthy to the sick. The pure price effect of insurance is the change in consumption of medical care that would occur if a consumer who is already ill were to purchase a contract from an insurer to reduce the price of medical care in return for an actuarially fair premium . In order to calculate the extent of the welfare loss of the insurance - which Nyman understands as the transaction cost of the insurance itself - it would be necessary to apply the classical Slutsky equation, but in practice it has yet to be quantified. 

Brown J M, Slutsky L J, Nelson K A and Cheng L T 1988 Velocity of sound and equations of state for methanol and ethanol in a diamond-anvil cell Science 241 65... 

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