National Income and the Environment

There is widespread recognition that we need to revise our methods of measuring national income to incorporate better the impact of economic activity on environmental assets. Our aim here is to investigate alternative concepts of national income in a dynamic economy, one a generalization of Hicksian income and the other a generalization of the welfare economics concept of income as the value of output at equilibrium prices. The relationships between these concepts and the Hamiltonian of a dynamic optimization problem in a representative agent economy can be characterized fully and rather neatly: 1. the Hamiltonian is a stationary equivalent utility level, a weighted average of future utilities where the weights are discount factors. 2. a ...rst order approximation to changes in the Hamiltonian is a Hicksian measure of the change in national income, equal in value to the real return available on the economy’s stocks. 3. national wealth is the present value of consumption over time, valued at supporting prices. 4. if a consumption path changes slightly, then the change in Hicksian income is the change in wealth times the discount rate. 5. change in wealth equals the present value of change in income minus the present value of changes in stock accumulation. The wealth concept seems more fundamental and in some ways more robust: it works for variable discount rates, zero discount rates, and the cake eating problem, whereas the income concept has problems in these cases. It also works for non-utilitarian objectives such as overtaking, the Chichilnisky criterion and the green golden rule, where as the income measure does not. A careful understanding of the two concepts is crucial to a proper treatment of changes in stocks in dynamic project evaluation: straightforward application of the income concept could lead to double counting.