Following the 1987 report by The World Commission on Environment and Development, the genuine saving has come to play a key role in the context of sustainable development, and the World Bank regularly publishes numbers for genuine saving on a national basis. However, these numbers are typically calculated as if the tax system is non-distortionary. This paper presents an analogue to genuine saving in a second best economy, where the government raises revenue by means of distortionary taxation. We show how the social cost of public debt, which depends on the marginal excess burden, ought to be reflected in the genuine saving. By presenting calculations for Greece, Japan, Portugal, U.K., U.S. and OECD average, we also show that the numbers published by the World Bank are likely to be biased and may even give incorrect information as to whether the economy is locally sustainable.
The purpose of this paper is to discuss under what conditions welfare can be measured by observables related to the national product (or Hamiltonian along the optimal trajectory). Under nonattributable technological or environmental change, welfare will depend on time itself, meaning that the Hamiltonian along the optimal trajectory will be a biased measure of welfare. This result will also hold if we make the time dependence of welfare endogenous, by replacing technological change will externalities that are not internalized during optimization. On the other hand, if we take the externalities fully into account, then the Hamiltonian will represent the appropriate measure of welfare. Similar results also hold in the case of uncertainty, where we show that a ‘generalized’ Hamiltonian provides a welfare measure, and that the deterministic measures are special cases of their stochastic counterparts.
This note concerns the importance of habit formation for social accounting. With internal habit formation, earlier procedures for welfare measurement in the first best apply with minor modifications. This result strengthens the idea behind using the comprehensive net national product as a welfare indicator. If, on the other hand, part of the habit formation is exogenous to each consumer, the exact welfare measure will also reflect the associated external effect.
The main purpose of this paper is to relate the empirical attempt of measuring output from the education sector to theoretical results about the welfare significance of an extended net national product (NNP) measure. We show that economic theory provides a more focused way of interpreting such output estimates, which has not been recognized in previous studies. The paper also contains new estimates of the output from the Swedish education sector.
The growth of an even-aged stand usually follows a S-shaped pattern, implying that the growth function is convex when stand age is low and concave when stand age is high. Given such a growth function, the Faustmann model could in theory have multiple optima and hence an interior local minimum solution. To ensure that the rotation age at which the first derivative of the land expectation value equals zero is a maximum, it is often assumed that the growth function is concave in stand age. Yet there is no convincing argument for excluding the possibility of conducting the final harvest before the growth function changes to concave. We argue that under normal circumstances the Faustmann model does not have any interior minimum. It is neither necessary nor proper to assume that the growth function is concave in the vicinity of the optimal rotation age. When the interest rate is high, the optimal rotation may lie in the interval on which the growth function is convex, i.e. before volume or value growth culminates.
A classical problem in forest economics is the determination of the optimal rotation age. It is commonly acknowledged that Martin Faustmann and Max Robert Pressler contributed the most to the solution of this problem. Faustmann formulated the renowned land expectation value formula, which laid the foundation for economic analyses of the optimal rotation problem. He also provided several hints on how to correctly solve the problem. Pressler's work focused on the growth of the capital in a forest stand. He invented the concept of Indicator Per Cent, and argued that the Indicator Per Cent should be used to guide forestry decision-making. Pressler correctly stated how to use the Indicator Per Cent to determine when a stand should be harvested. However, his suggestions about the choice among silviculture options indicate that he did not fully understand the economic implication of the Indicator Per Cent.
This article presents an overview of the application of taxation as a policy instrument in forestry. Forests cover about 30% of the total land area and constitute one of the most important natural resources on the planet. Forests worldwide produce a great amount of timber and various non-wood products, and they provide a wide range of ecological services. Following a brief review of the major forms of inefficiency of forest management in free markets, we discuss the behavioral effects of the general types of taxes targeted at forest assets and forestry income. This is followed by a review of the forest taxation systems in four selected countries (China, Finland, Sweden, and the United States). It is concluded that forest taxation has been used mainly for the purpose of collecting public revenues. Two common forms of inefficiency with respect to forest management are overharvesting (especially in developing countries) of existing forests and underinvestment in reforestation. Forest taxes and subsidies that are effective in correcting one type of inefficiency usually intensify the type of inefficiency. The effectiveness of taxes as a policy instrument to promote sustainable management of forest resources, remain to be evaluated.
This paper examines the effect of risk aversion on the optimal rotation when the stumpage price is stochastic. Assuming that the stumpage price is normally distributed, we show that the optimal rotation under risk aversion may be shorter than, equal to, or longer than the corresponding optimal rotation under risk neutrality. Which of these cases holds true depends on the interest rate and the real regeneration cost, and can be determined based on the marginal variance (i.e., the derivative of the variance function with respect to rotation age) evaluated at the optimal rotation under risk neutrality. Furthermore, we show that there exists a monotone continuous curve, which divides the interest rate-regeneration cost space into two regions where risk aversion affects the optimal rotation differently. For a given interest rate, risk aversion shortens (prolongs) the optimal rotation if the regeneration cost lies below (above) the curve. Along the separating curve the optimal rotation under risk aversion coincides with the optimal rotation under risk neutrality. Two examples are presented to demonstrate the separating curve and the impacts of risk aversion on the optimal rotation.
The paper assesses the welfare effects of biotechnological progress, as exemplified by tree improvements, using a partial equilibrium model. Timber demand is assumed to be stochastic and the distributions of its coefficients known. The coefficients of a log-linear supply function are determined by maximizing the expected present value of the total surplus of timber production, both in the presence and in the absence of genetically improved regeneration materials. The supply functions are then used to estimate the expected present values of the total surplus in different cases through simulation. These estimates enable us to assess the direct effect and the effect of changing harvest behavior on the expected present value of the total surplus. The main results of the study are (i) the presence of genetically improved regeneration materials has significant impacts on the aggregate timber supply function; (ii) the application of genetically improved regeneration materials leads to a significant increase in the expected present value of the total surplus; and (iii) a considerable proportion of the welfare gain results from the change in harvest behavior. A conclusion we draw from this study is that ignoring the influences of technological and policy changes on behavior can lead to significantly biased welfare estimates. We view the model as a potential approach to conducting counterfactual policy comparisons in economics without forward-looking data.
The purpose of this paper is to analyze the effects of different sickness insurance regimes on the employee decision reporting sick or not. We can think of the design problem as a representative employer’s decision to determine the optimal relationship between the wage and the sickness pay. The employee bases her decision to work or not on this relative price and her exogenously given health status that varies between individuals. We believe that the incentives present in the model are able to tell as about relevant aspects of the incentives involved in a state managed sickness insurance system. We calculate how the control variables depend on parameters such as the average productivity of the worker, the average productivity of the substitute, the wage of the substitute, and the search cost to find a substitute. Since we assume that the health status of the work force is heterogeneous and represented by a distribution function, we are also able to calculate the change in the work participation rate, as a function of the parameters.
This paper is an attempt to investigate the cost-of-living index problem in a general equilibrium multi-sector growth model. Instead of using the utility function as a compensation criterion as Konüs’ (1924) did in his original contribution, we take advantage of the current-value Hamiltonian in constructing our dynamic price index. Since the Hamiltonian is a constancy-equivalent of future utilities (Weitzman, 1976), the dynamic price index is defined in terms of the minimum expenditure that, under alternative prices, would support the constancy-equivalent-utility level in the future. We show that, when properly deflated by the dynamic price index, the real comprehensive net national product becomes an ideal measure for dynamic welfare comparisons. For some special cases, we show that the dynamic price index reduces to the simple static index.
This note shows that the well-known Hotelling rule holds for a wider class of capital investment projects satisfying the property of process independence. Optimality behavior is therefore not a necessary condition for deriving the result.
This paper deals with the modern theory of social cost–benefit 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–benefit rules for evaluating a small project. In particular, we show that the direct change in a net national product (NNP) qualifies as a convenient welfare index without involving any other induced side effects. 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.
The concept of genuine saving has in recent years become widely accepted as a dynamic welfare indicator, which first appeared in Weitzman (Q. J. Econ. 99:1–13, 1976) and then formalized by Pearce and Atkinson (Ecol. Econ. 8:103–108, 1993). This paper attempts to generalize this concept in a stochastic setting using an extended version of the standard Ramsey growth model (Merton in Rev. Econ. Stud. 42:375–379, 1975). We find that the genuine saving formula in a stochastic setting also involves a variance component reflecting the welfare loss from risk aversion.
The concept of genuine savings has in recent years become widely accepted as a dynamic welfare indicator, which first appeared in Weitzman (1976) and then "formalized" by Pearce and Atkinson (1993). This paper attempts to generalize this concept in a stochastic setting using the Dasgupta-Heal-Solow growth model under the Merton (1975) type of population growth uncertainty. It is shown that the formula for genuine savings under uncertainty also involves a variance component reflecting the welfare loss from risk aversion (cf. Li and Lofgren, 2012). Moreover, the welfare implications of the risk-adjusted genuine savings on depletable resource management are explored.
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 a function to be integrated over time. 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.
This paper is concerned with welfare measurement in multisector dynamic general equilibrium models with externalities. We start with the utility metric theory under di¤erent settings, and then transfer them into money metric measures. With ideal accounting prices for all externalities, we show that a money measure of dynamic welfare should encompass both the comprehenstive NNP and consumer surpluses. Under externalities, a forward-looking term re.ecting the present value of the future externalities has to be taken into account. For a local-in-time welfare comparison, we show that growth in conventionally measured NNP would work, provided that an externality-adjusted genuine rate of return is positive.
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.
A classical structure that is used to analyze the water and diamond paradox provides an intuitive underpinning to the modern theory of welfare measurement in a growth context. John Law’s and Adam Smith’s concepts of value-in-use and value-in-exchange have modern aggregated counterparts. Complemented with Dupuit’s extension in terms of a utility function with a declining marginal utility, they are close to enough to provide the intuition behind important aspects of modern dynamic welfare measurement. We answer four modern questions: (1) Will an increase in the level of NNP indicate a welfare improvement? (3) Will NNP growth indicate a local welfare improvement? (3) If the answers to (1), (2) are no, what are the underlying reasons? (4) How do the correct welfare indicators look like? At least Dupuit, as an inventor of the consumer surplus, may perhaps have agreed with some of the answers to the modern dynamic approach.
Allmänningarnas problem har varit kända åtminstone sedan 1700-talet. Sätten att hantera dem är framtagna under 1900-talet. Det fanns till att börja med två skolor; s.k. Pigouvianska skatter och upprätthållandet av välspecificerade äganderätter. Den nyligen bortgångna Ekonomipristagaren Elinor Ostrom har under slutet av 1900-talet, i stort sett på egen hand, arbetat men en institutionell ansats som har fått ett stort genomslag i teori och praktik. Denna uppsats försöker sammanfatta vad hon åstadkommit. Vad hon tillfört är en fördjupad analys av detaljer i verkligheten som visar hur ett spektrum av institutionella lösningar kan uppstå, ofta endogent, inom samfälligheten.
This paper studies how envelope theorems have been used in Economics, their history and also who first introduced them. The existing literature is full of them and the reason is that all families of optimal value functions can produce them. The paper is driven by curiosity, but hopefully it will give the reader some new insights.
Timber harvest decision is one of the most important topics of forest economics. Martin Faustmann presented in 1849 the first "correct model" for determining the optimal time to harvest a forest stand. The Faustmann model builds on a set of restrictive assumptions that are far from realistic. During the past four decades the Faustmann model has been extended substantially. One important extension is the inclusion of non-timber benefits. Another is the recognition of uncertainty, especially the adoption of the adaptive optimization framework to determine the optimal time to harvest a stand under conditions of uncertainty. Currently available economic models of forest harvest decisions can be used to determine the optimal time to harvest a forest stand in a variety of special cases, but their ability to describe a typical harvest decision problem remains unsatisfactory. To improve the decision models, researchers must pay more attention to the fact that forests usually are managed for multiple purposes and under conditions of economic, biological, and ecological uncertainties. Therefore, non-timber benefits and uncertainties need to be considered simultaneously, which often implies that the decisions for different stands are interdependent. The information needed for applying the decision models also requires much more research. A particularly important, yet difficult, matter is the rational expectations timber price process.
This paper derives a dynamic cost–benefit rule for evaluating large projects. We show that, in addition to the conventional income and consumer surplus measures, the rule also entails an extra term involving capital cost changes.
This paper is concerned with the welfare significance of real comprehensive NNP based on an exact dynamic price index. We extend the Konus classical index number theory by taking into account current environmental externalities and investment for future consumption enhancement. It is shown that, when deflated with the proper dynamic price index, the real green NNP becomes an ideal measure for welfare comparisons over time. We demonstrate the application of the theory using time series data from the United States over the period from 1959 to 2008.
We show that growth in NNP measured in constant prices indicates welfare improvement, provided that an observable rate of return measure is positive. This is an alternative welfare interpretation of growth in comprehensive NNP compared with that of Asheim and Weitzman [Asheim, B.G., Weitzman, M.L., 2001. Does NNP growth indicate welfare improvement? Economic Letters 73, 233–239] which is based on a Divisia consumer price index.
This paper reviews some historical development and modern applications of the envelope theorems in economics from a static to a dynamic context. First, we show how the static version of the theorem surfaced in economics, which had eventually lead to the well-known Shephard's lemma in microeconomics. Second, we present its dynamic version in terms of the classical calculus of variations and optimal control theory via the optimized Hamiltonian function. Third, we show some applications of the theorem for deriving dynamic cost-benefit rules with special reference to environmental projects involving the green or comprehensive net national product (CNNP). Finally, we illustrate how to extend the cost-benefit rules to a stochastic economic growth setting.
Description Concerns about natural resource scarcity, together with the increased awareness of environmental problems, have led to widespread interest in green accounting, which attempts to extend the standard national accounts to include the yields from natural and environmental resources. For this volume, Professors Löfgren and Li have selected the classic articles in this rapidly growing area, with particular reference to sustainability. They have also written an authoritative new introduction which offers a comprehensive overview of the literature both from a historical and a formal theoretical perspective.