Working paper: Growth, Pollution, and Money-Metric Welfare in Imperfect Markets by Chuan-Zhong Li and CERE:s Karl-Gustaf Löfgren

The paper shows how utility based welfare measures in dynamic general equilibrium under imperfect markets can be transferred into a money metrics. One problem is to
price forward looking components measured in units of utility and the sufficient conditions are rather demanding. The typical comprehensive (green or inclusive) quasi-static welfare measure contains a core that looks like a comprehensive NNP component, as well as additional consumer surplus terms for both consumption goods and the externality. In addition, it contains a forward looking component with the discounted value of the marginal externality as the function to be integrated over time is also required.

A price index that is independent of the market basket is needed, and this can theoretically be done by using the index approach presented in this paper or by assuming that the marginal utility of income is constant over time. Forward looking components measured in units of utility can be priced by using current willingness to pay or current prices as they may be good approximations, or by assuming that the economy is in a steady state. With respect to local welfare measures the authors argue that growth in traditional NNP will work, provided that they condition on a positive average marginal rate of return of investment, and use an augmented genuine saving concept.

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