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Evaluating Projects in a Dynamic Economy: Some New Envelope Results

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Author Info
Chuan-Zhong Li
Karl-Gustaf Löfgren

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Abstract

This 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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0475.2008.00420.x
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Article provided by Blackwell Publishing in its journal German Economic Review.

Volume (Year): 9 (2008)
Issue (Month): (02)
Pages: 1-16
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Handle: RePEc:bla:germec:v:9:y:2008:i::p:1-16

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kenneth Arrow & Partha Dasgupta & Karl-Göran Mäler, 2003. "Evaluating Projects and Assessing Sustainable Development in Imperfect Economies," Working Papers 2003.109, Fondazione Eni Enrico Mattei. [Downloadable!]
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  2. Asheim, Geir B., 2000. "Green national accounting: why and how?," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 25-48, February. [Downloadable!]
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  3. Aronsson, Thomas & Lofgren, Karl-Gustaf, 1999. "Welfare equivalent NNP under distributional objectives," Economics Letters, Elsevier, vol. 63(2), pages 239-243, May. [Downloadable!] (restricted)
  4. Boadway, Robin W, 1975. "Cost-benefit Rules in General Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 42(3), pages 361-74, July. [Downloadable!] (restricted)
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  5. Weitzman, Martin L, 2001. " A Contribution to the Theory of Welfare Accounting," Scandinavian Journal of Economics, Blackwell Publishing, vol. 103(1), pages 1-23, March. [Downloadable!] (restricted)
  6. Dixit, Avinash & Hammond, Peter & Hoel, Michael, 1980. "On Hartwick's Rule for Regular Maximin Paths of Capital Accumulation and Resource Depletion," Review of Economic Studies, Blackwell Publishing, vol. 47(3), pages 551-56, April. [Downloadable!] (restricted)
  7. Dasgupta, Partha, 2001. "Valuing Objects and Evaluating Policies in Imperfect Economies," Economic Journal, Royal Economic Society, vol. 111(471), pages C1-29, May. [Downloadable!] (restricted)
  8. Caputo, Michael R., 1990. "How to do comparative dynamics on the back of an envelope in optimal control theory," Journal of Economic Dynamics and Control, Elsevier, vol. 14(3-4), pages 655-683, October. [Downloadable!] (restricted)
  9. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989 Elsevier. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Li, Chuan-Zhong & Isacsson, Gunnar, 2009. "Valuing urban accessibility and air quality in Sweden: A regional welfare analysis," Working Paper Series 2009:2, Uppsala University, Department of Economics. [Downloadable!]
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