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Evaluating Projects in a Dynamic Economy: Some New Envelope Results

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  • Li, Chuan-Zhong

    (Department of Economics)

  • Löfgren, Karl-Gustaf

    (Department of Economics, Umeå University)

Abstract

This paper is concerned with the modern theory of social cost-bene.t 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-bene.t rules for evaluating a small project. In particular, we show that the direct change in net national product (NNP) quali.es as a convenient welfare index without involving any other induced side e¤ects. 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.

Suggested Citation

  • Li, Chuan-Zhong & Löfgren, Karl-Gustaf, 2003. "Evaluating Projects in a Dynamic Economy: Some New Envelope Results," Umeå Economic Studies 613, Umeå University, Department of Economics, revised 04 Dec 2006.
    • Handle: RePEc:hhs:umnees:0613
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    References listed on IDEAS

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    More about this item

    Keywords

    dynamic cost-bene.t analysis; net national product; project evaluation; welfare index;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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