Umeå Economic Studies
No 590: On the Choice of Metrics in Dynamic Welfare Analysis: Utility versus Money Measures
Chuan-Zhong Li (czl@du.se) and Karl-Gustaf Löfgren (Karl-Gustaf.Lofgren@econ.umu.se)
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.
Keywords: Dynamic cost-benefit analysis; green national accounting; utility versus money metrics, Weitzman´s theorem
JEL-Codes: D61; D91; Q01
22 pages, Monday, August 26, 2002
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