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On the Choice of Metrics in Dynamic Welfare Analysis: Utility versus Money Measures

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Author Info

  • Li, Chuan-Zhong

    ()
    (Dalarna University)

  • Löfgren, Karl-Gustaf

    ()
    (Department of Economics, Umeå University)

Abstract

This paper is concerned with the choice of metrics for social cost-benefit analysis and dynamic welfare comparisons. In a utility-theoretic framework, we show that there is always a money measure that can serve as a substitute for the maximized utility wealth. Thus, under the non-arbitrage course of discount rate, the choice between utility and money measures has no real effect on project evaluations. We also define a generalized comprehensive net national product measure with a consumer surplus term incorporated, which is completely consistent with the Weitzman foundation. It is shown that while a green (comprehensive) NNP growth simply reflects the income effect, the change in consumer surplus captures the welfare effect of relative price changes. We argue that the reason for green NNP to be a weak welfare indicator is not due to its choice of money metric per se but the ignorance of a consumer surplus term.

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Bibliographic Info

Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 590.

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Length: 22 pages
Date of creation: 26 Aug 2002
Date of revision:
Handle: RePEc:hhs:umnees:0590

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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
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Web page: http://www.econ.umu.se/
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Related research

Keywords: Dynamic cost-benefit analysis; green national accounting; utility versus money metrics; Weitzman´s theorem;

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References

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  1. Weitzman, Martin L, 1976. "On the Welfare Significance of National Product in a Dynamic Economy," The Quarterly Journal of Economics, MIT Press, vol. 90(1), pages 156-62, February.
  2. 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, Wiley Blackwell, vol. 47(3), pages 551-56, April.
  3. Weitzman, Martin L, 2001. " A Contribution to the Theory of Welfare Accounting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 1-23, March.
  4. Turner, Paul & Tschirhart, John, 1999. "Green accounting and the welfare gap," Ecological Economics, Elsevier, vol. 30(1), pages 161-175, July.
  5. Asheim, Geir B. & Weitzman, Martin L., 2001. "Does NNP growth indicate welfare improvement?," Economics Letters, Elsevier, vol. 73(2), pages 233-239, November.
  6. Thomas Aronsson & Karl-Gustaf Löfgren, 1998. "Green Accounting in Imperfect Market Economies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(3), pages 273-287, April.
  7. Per-Olov Johansson & Karl-Gustaf Löfgren, 1996. "On the interpretation of ‘green’ NNP measures as cost-benefit rules," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 7(3), pages 243-250, April.
  8. Vincent, Jeffrey R., 2000. "Green accounting: from theory to practice," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 13-24, February.
  9. Dasgupta, Partha & M Ler, Karl-G Ran, 2000. "Net national product, wealth, and social well-being," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 69-93, February.
  10. Aronsson, Thomas & Lofgren, Karl-Gustaf, 1999. "Welfare equivalent NNP under distributional objectives," Economics Letters, Elsevier, vol. 63(2), pages 239-243, May.
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Cited by:
  1. Gancho Todorov Ganchev, 2010. "On the Utility of Money," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 32-60.

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