Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 694: Money Metrics Welfare Measures in Imperfect Markets under Growth
Chuan Zhong Li () and Karl-Gustaf Löfgren ()
Additional contact information
Chuan Zhong Li: Uppsala University, Box 513, Postal: SE-751 20 Uppsala, Sweden
Karl-Gustaf Löfgren: Department of Economics, Umeå University, Postal: 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 quasi-static welfare measure contains a core that looks like a comprehensive (green) 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 turn 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 under growth; imperfect markets; utility versus money metrics
19 pages, August 28, 2006
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