Evaluating Projects in a Dynamic Economy: Some New Envelope Results

Document identifier: oai:dalea.du.se:2406
Keyword: Dynamic cost-benefit analysis, Net national product, Project evaluation, Welfare index.
Publication year: 2008

This paper is concerned 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 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.


Chuan-Zhong Li

Högskolan Dalarna; Nationalekonomi
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Karl-Gustaf Löfgren

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