Demerits of the Revealed Preference Theory
Whereas the R.P. theory has several merits as compared with the earlier theories, it is not free from defects:
(1) It is based on strong ordering and as such does not admit of indifference. But since observed choice implies a number of possible alternatives, indifference cannot be ruled out altogether. The consumer is sometimes confronted with alternatives which are equally desirable and he is hesitant to choose between them.
(2) It is quite reasonable to assume that an individual is able to compare the different alternatives open to him. Hence, there is a possibility of indifference and of remaining at the same level of satisfaction by sacrificing some units of a good in order to obtain additional units of some other good. As Mr. Tapas Majumdar points out, capacity to compare is the very basis of welfare economics.
(3) Further, Mr. Armstrong asserts that round about every chosen point there arc points of indifference. A consumer goes through these points to reach the most desirable end. The combination actually chosen is thus a point of the series of points of indifference.
(4) Moreover, it is pointed out that since Samuelson's R.P. theory is based on actually observed behavior, there is no room for making a distinction between income effect and substitution effect. And since response of demand to a change in price (i.e., price effect) has two components, income effect and substitution effect, it is supposed that Samuelson's R.P. theory gives only a partial, explanation of change in demand as a result of change in price. But Samuelson makes a clear distinction between income effect and what he calls over-compensation effect which is similar to substitution effect.
(5) Another flaw in the theory of revealed preference arises from the assumption of positive income-elasticity of demand. In view of this assumption, this theory fails to enunciate the demand theorem when income-elasticity of demand is negative. It only enunciates the demand theorem in a case in which substitution effect of a price change has been reinforced by positive income effect. It cannot, therefore, explain Giffen's paradox in which the income effect is negative and this negative effect is so powerful that it outweighs the substitution effect. But we know that this paradox is theoretically conceivable. We know that, in the case of inferior goods, demand changes in the same direction as price. In ill is respect. Hicks-Allen indifference theorem is more general than Samuelson's R.P, theory.