Working Papers,
National Institute of Economic Research

Abstract: Human capital is an important component of economic growth. The article extends a theoretical model for comprehensive national accounting to the welfare effects of pollution on human capital. The model includes a production externality in the form of a flow of air pollutants that cause both direct disutility and indirect welfare effects by negatively affecting the productivity of labor. We show that defensive medical expenditures or healthcare costs allocated to mitigating the disutility of air pollution should not be deducted from conventional net national product (NNP), whereas the value of the percieved disutility of illness episodes caused by pollution should be subtracted from NNP. We derive a marginal cost-benefit rule for an optimal level of pollution given its negative health effects. The rule can be used for determining an optimal tax on harmful emissions. Finally, we outline a scheme for empirical comprehensive accounting and for estimation of an emissions tax.

32 pages, May 14, 2003

Note: This paper is published as: Huhtala,A. and E. Samakovlis (2007), "Flows of Air Pollution, Ill Health and Welfare", Environmental and Resource Economics, 37 (2)

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