Scandinavian Working Papers in Economics

CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

No 2012:15: Growth, Pollution, and Money-Metric Welfare in Imperfect Markets

Chuan-Zhong Li () and Karl-Gustaf Löfgren ()
Additional contact information
Chuan-Zhong Li: Uppsala University, Postal: Dept. of Economics, Uppsala University, Box 513, S-751 20 UPPSALA
Karl-Gustaf Löfgren: CERE, Postal: Department of Economics and Center for Environmental and Resource Economics,, Umeå University, , S-901 87 Umeå, Sweden

Abstract: This paper shows how utility based welfare measures in dynamic general equilibrium under imperfect markets can be transferred into a money metrics. In order to do this, we need to price forward looking components measured in units of utility. 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. To accomplish this, we need a price index that is independent of the market basket, or to assume that the marginal utility of income is constant over time. With respect to local welfare measures it turns out that growth in traditional NNP will surprisingly work, provided that we condition on a positive average marginal rate of return of investment, and use an augmented genuine saving concept.

Keywords: Welfare measurement; comprehensive NNP; imperfect markets; money metrics

JEL-codes: D61; D91; Q01

20 pages, September 28, 2012

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