Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 613: Evaluating Projects in a Dynamic Economy: Some New Envelope Results

Chuan-Zhong Li () and Karl-Gustaf Löfgren ()
Additional contact information
Chuan-Zhong Li: Department of Economics, Postal: Uppsala University, S 751 20 Uppsala, Sweden
Karl-Gustaf Löfgren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: This paper is concerned with the modern theory of social cost-bene.t analysis in a dynamic economy. The theory emphasizes the role of a comprehensive, forward- looking, dynamic welfare index within the period of the project rather than that of a project.s long-term consequences. However, what constitutes such a welfare index remains controversial in the recent literature. In this paper, we attempt to shed light on the issue by deriving three equivalent cost-bene.t rules for evaluating a small project. In particular, we show that the direct change in net national product (NNP) quali.es as a convenient welfare index without involving any other induced side e¤ects. The project evaluation criterion thus becomes the present discounted value of the direct changes in NNP over the project period. We also illustrate the application of this theory in a few stylized examples.

Keywords: dynamic cost-bene.t analysis; net national product; project evaluation; welfare index

JEL-codes: D61

19 pages, First version: September 15, 2003. Revised: December 4, 2006.

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