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

Author

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  • 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.

Suggested Citation

  • Li, Chuan-Zhong & Löfgren, Karl-Gustaf, 2002. "On the Choice of Metrics in Dynamic Welfare Analysis: Utility versus Money Measures," Umeå Economic Studies 590, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0590
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    References listed on IDEAS

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    1. 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.
    2. Thomas Aronsson & Karl-Gustaf Löfgren, 1998. "Green Accounting in Imperfect Market Economies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(3), pages 273-287, April.
    3. Martin L. Weitzman, 1976. "On the Welfare Significance of National Product in a Dynamic Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 90(1), pages 156-162.
    4. Vincent, Jeffrey R., 2000. "Green accounting: from theory to practice," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 13-24, February.
    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. Per-Olov Johansson & Karl-Gustaf Löfgren, 1996. "On the interpretation of ‘green’ NNP measures as cost-benefit rules," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 7(3), pages 243-250, April.
    7. Aronsson, Thomas & Lofgren, Karl-Gustaf, 1999. "Welfare equivalent NNP under distributional objectives," Economics Letters, Elsevier, vol. 63(2), pages 239-243, May.
    8. 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.
    9. 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.
    10. Turner, Paul & Tschirhart, John, 1999. "Green accounting and the welfare gap," Ecological Economics, Elsevier, vol. 30(1), pages 161-175, July.
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    Cited by:

    1. Sjögren, Tomas, 2016. "Age Dependent Discount Rates, Time Inconsistent Behavior and Welfare Measurement," Umeå Economic Studies 934, Umeå University, Department of Economics.
    2. Gancho Todorov Ganchev, 2010. "On the Utility of Money," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 32-60.

    More about this item

    Keywords

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

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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