On the Choice of Metrics in Dynamic Welfare Analysis: Utility versus Money Measures

This paper is concerned with the choice of metrics for social cost-benefit analysis and dynamic welfare comparisons. We show that behind the intertemporal welfare maximization in a utilitarian framework, there is always a money wealth measure that can serve as a substitute for the maximized utility wealth. Thus, under the non-arbitrage course of discount rates, the choice between utility and money measures has no real effect on project evaluations. We also define a generalized comprehensive net national product (GCNNP) measure in real money terms, that can be used for dynamic welfare comparisons. This new measure, which is an augmented version of the green net national product (NNP) with a consumer surplus-like term incorporated, is completely in accordance with the Weitzman’s basic formulation. Given that the current-value Hamiltonian corresponds to the stationary equivalent of future utility, the GCNNP can be expressed as a stationary equivalent of future consumption value plus a consumer surplus measure. With the help of the GCNNP, we examine the welfare significance of the standard green or comprehensive NNP as a special case. It is shown that for an exogenous increase and a local growth, the standard green NNP can be regarded as a satisfactory welfare measure. For overall welfare comparisons over time, however, one has to use the GCNNP with a consumer surplus-inclusive term as anticipated by Weitzman (2002). While the growth in NNP over time simply reflects an income effect, the change in consumer surplus can capture the welfare effects of relative price changes. Therefore, we argue that the reason for the green NNP to be a weak welfare indicator is not because of its choice of a money metrics per se, but it ignores a consumer surplus term.