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Some Unpleasant Natural Resource Accounting Arithmetic: The Welfare Inconsitency of

  • Harris, M.
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    Advocates of natural resource accounting argue for the revision and refonnulation of national accounting practices in order to better account for the depletion and degradation of a nation's resource stocks and environmental assets. The literature is predicated on three key assumptions: that national income is an important policy variable ("social objective function"); that current accounting practices are poorly designed as social objective functions and lead to bad policy-making; and that improving the construction of key accounting aggregates will result in improvements in policy decisions and outcomes. The purpose of this paper is to examine the third of these claims. I introduce the "we1fare-consistency" criterion, which is satisfied when changes in a "comprehensive income" measure are positively correlated with changes in welfare. A series of simple counter-examples in a cake-eating economy is presented to show that this criterion is not generally satisfied by modifications proposed in the resource accounting literature. The divergence between income and welfare is explicable in tenns of consumer surplus, which plays a role in welfare but not in income. An example using renewable resources is also presented to show that sustainable equilibria may not be welfare-consistent.

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    Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 765.

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    Length: 36 pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:mlb:wpaper:765
    Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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    1. William D. Nordhaus & James Tobin, 1971. "Is Growth Obsolete?," Cowles Foundation Discussion Papers 319, Cowles Foundation for Research in Economics, Yale University.
      • William D. Nordhaus & James Tobin, 1973. "Is Growth Obsolete?," NBER Chapters, in: The Measurement of Economic and Social Performance, pages 509-564 National Bureau of Economic Research, Inc.
      • William D. Nordhaus & James Tobin, 1972. "Is Growth Obsolete?," NBER Chapters, in: Economic Research: Retrospect and Prospect, Volume 5, Economic Growth, pages 1-80 National Bureau of Economic Research, Inc.
    2. Common,Michael, 1995. "Sustainability and Policy," Cambridge Books, Cambridge University Press, number 9780521436052.
    3. Dasgupta, P., 1990. "The Environment as Commodity.i," Research Paper 84, World Institute for Development Economics Research.
    4. Kjell Arne Brekke, 1997. "Hicksian Income from Resource Extraction in an Open Economy," Land Economics, University of Wisconsin Press, vol. 73(4), pages 516-527.
    5. Sefton, J. A. & Weale, M. R., 1996. "The net national product and exhaustible resources: The effects of foreign trade," Journal of Public Economics, Elsevier, vol. 61(1), pages 21-47, July.
    6. Brekke, Kjell Arne, 1994. " Net National Product as a Welfare Indicator," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(2), pages 241-52.
    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. Bradford, David F, 1990. "Extended Accounts for National Income and Product: Comment," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1183-86, September.
    9. Asheim, Geir B., 1996. "Capital gains and net national product in open economies," Journal of Public Economics, Elsevier, vol. 59(3), pages 419-434, March.
    10. Dasgupta, Partha, 1990. "The Environment as a Commodity," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 51-67, Spring.
    11. John M. Hartwick, 1990. "Natural Resources, National Accounting and Economic Depreciation," Working Papers 771, Queen's University, Department of Economics.
    12. Hamilton, Kirk, 1994. "Green adjustments to GDP," Resources Policy, Elsevier, vol. 20(3), pages 155-168, September.
    13. Scott, Maurice, 1990. "Extended Accounts for National Income and Product: A Comment," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1172-79, September.
    14. Karl-Göran Mäler, 1991. "National accounts and environmental resources," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 1(1), pages 1-15, March.
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