Welfare Measurement in Imperfect Markets

Welfare Measurement in Imperfect Markets

A Growth Theoretical Approach

New Horizons in Environmental Economics series

Thomas Aronsson, Karl-Gustaf Löfgren and Kenneth Backlund

This book cleverly integrates the research on welfare measurement and social accounting in imperfect market economies. In their previously acclaimed volume, Welfare Measurement, Sustainability and Green National Accounting, the authors focused on the external effects associated with environmental damage and analysed their role in the context of social accounting. This book adopts a much broader perspective by analysing a wide spectrum of resource allocation problems of real-world market economies.

Chapter 9: Welfare Measurement under Uncertainty

Thomas Aronsson, Karl-Gustaf Löfgren and Kenneth Backlund

Subjects: economics and finance, environmental economics, valuation, environment, environmental economics, valuation


It has been established in Chapter 2 that a static equivalent of welfare is embedded in a deterministic autonomous Ramsey problem. It has also been shown that technological progress and imperfect market conditions will complicate welfare measurement, as well as add terms that contain forward looking components. In this chapter we show that the results derived under an assumption of perfect certainty are special cases of more general results which form part of the toolkit of stochastic dynamic optimization. More precisely, such results follow as special cases of the first order conditions of a stochastic Ramsey problem. Here, as in Chapter 7, we introduce population growth explicitly into the analysis. We also provide intuition for some of the technicalities created by introducing growth as a continuous-time stochastic process known as Brownian motion (often called a Wiener process). The chapter1 is organized as follows. After briefly reviewing some of the mathematical tools of stochastic control theory in Section 9.1, we use these tools in Section 9.2 to analyze a stochastic Ramsey problem originally introduced by Merton (1975). In Section 9.3 we derive stochastic versions of previous welfare measures. Section 9.4 contains a paralleled analysis for a stochastic version of our workhorse model. The derivation of a cost–benefit rule is dealt with in Section 9.5, and a general principle for obtaining a closed form solution is examined in Section 9.6. We illustrate these principles and the cost–benefit rule by a numerical example. Section 9.7 sums up the...

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