On the Choice of Metrics in Dynamic Welfare Analysis: Utility versus Money Measures
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.
|Date of creation:||26 Aug 2002|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden|
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"Does NNP growth indicate welfare improvement?,"
02/2001, Oslo University, Department of Economics.
- Vincent, Jeffrey R., 2000. "Green accounting: from theory to practice," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 13-24, February.
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- Avinash Dixit & Peter Hammond & Michael Hoel, 1980. "On Hartwick's Rule for Regular Maximin Paths of Capital Accumulation and Resource Depletion," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 551-556.
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