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Evaluating Projects in a Dynamic Economy: Some New Envelope Results

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  • Chuan‐Zhong Li
  • Karl‐Gustaf Löfgren

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.

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  • Chuan‐Zhong Li & Karl‐Gustaf Löfgren, 2008. "Evaluating Projects in a Dynamic Economy: Some New Envelope Results," German Economic Review, Verein für Socialpolitik, vol. 9(1), pages 1-16, February.
    • Handle: RePEc:bla:germec:v:9:y:2008:i:1:p:1-16
    DOI: 10.1111/j.1468-0475.2008.00420.x
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    References listed on IDEAS

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    7. 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.
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    Cited by:

    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.

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