Evaluating Projects in a Dynamic Economy: Some New Envelope Results
AbstractThis paper deals with the modern theory of social cost-benefit analysis in a dynamic economy. The theory emphasizes the role of a comprehensive, forward-looking, dynamic welfare index within the period of the project rather than that of a project's long-term consequences. However, what constitutes such a welfare index remains controversial in the recent literature. In this paper, we attempt to shed light on the issue by deriving three equivalent cost-benefit rules for evaluating a small project. In particular, we show that the direct change in a net national product (NNP) qualifies as a convenient welfare index without involving any other induced side effects. The project evaluation criterion thus becomes the present discounted value of the direct changes in NNP over the project period. We also illustrate the application of this theory in a few stylized examples. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2008.
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Bibliographic InfoArticle provided by Verein für Socialpolitik in its journal German Economic Review.
Volume (Year): 9 (2008)
Issue (Month): (02)
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Other versions of this item:
- Li, Chuan-Zhong & Löfgren, Karl-Gustaf, 2003. "Evaluating Projects in a Dynamic Economy: Some New Envelope Results," UmeÃ¥ Economic Studies 613, Umeå University, Department of Economics, revised 04 Dec 2006.
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
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