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Evaluating Projects in a Dynamic Economy: Some New Envelope Results

  • Li, Chuan-Zhong


    (Department of Economics)

  • Löfgren, Karl-Gustaf


    (Department of Economics, Umeå University)

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) 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.

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Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 613.

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Length: 19 pages
Date of creation: 15 Sep 2003
Date of revision: 04 Dec 2006
Handle: RePEc:hhs:umnees:0613
Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
Web page:

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  1. Robin W. Boadway, 1975. "Cost-benefit Rules in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 42(3), pages 361-374.
  2. Kenneth Arrow & Partha Dasgupta & Karl-Göran Mäler, 2003. "Evaluating Projects and Assessing Sustainable Development in Imperfect Economies," Working Papers 2003.109, Fondazione Eni Enrico Mattei.
  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. Aronsson, Thomas & Lofgren, Karl-Gustaf, 1999. "Welfare equivalent NNP under distributional objectives," Economics Letters, Elsevier, vol. 63(2), pages 239-243, May.
  5. 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.
  6. Dasgupta, Partha, 2001. "Valuing Objects and Evaluating Policies in Imperfect Economies," Economic Journal, Royal Economic Society, vol. 111(471), pages C1-29, May.
  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. 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.
  9. Asheim, Geir B., 2000. "Green national accounting: why and how?," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 25-48, February.
  10. 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.
  11. 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.
  12. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989 Elsevier.
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