Karl-Göran Mäler

Net National Product, Wealth, and Social Well-Being

This paper is about net national product (NNP). We are concerned with what NNP means, what it should include, what it offers us and, therefore, why we may be interested in it. We show that NNP, properly defined, can be used to evaluate economic policies, but we also show that it should not be used in any of its more customary roles, such as in making intertemporal and cross-country comparisons of social well-being. We develop such indices as would be appropriate for making those comparisons. In particular, we show that welfare comparisons should involve comparisons of wealth. Writings on the welfare economics of NNP have mostly addressed economies pursuing optimal policies, and are thus of limited use. Our analysis generalises this substantially by studying economies whose governments are capable of engaging only in policy reforms. We show how linear indices can be used for the evaluation of policy reform even in the presence of non-convexities in the economic environment. The analysis pertinent for optimising governments are special limiting cases of the one we develop.The literature on green NNP has widely interpreted NNP as ‘constant-equivalent consumption’. We show that this interpretation is wrong. It is the Hamiltonian that equals constant-equivalent utility. Since both theory and empirics imply that the Hamiltonian is a non-linear function of consumption and leisure, the Hamiltonian should not be confused with NNP.

National accounts and environmental resources

In the paper, optimal growth theory is used to derive the appropriate definition of the net national product concept, when there are environmental resources and environmental damage to take into account. The basic conclusions are that conventional defined NP should be corrected by deducting environmental damage and adding the value of the net change of all resources.

Evaluating Projects and Assessing Sustainable Development in Imperfect Economies

We are interested in three related questions: (1) How should accounting prices be estimated? (2) How should we evaluate policy change in an imperfect economy? (3) How can we check whether intergenerational well-being will be sustained along a projected economic programme? We do not presume that the economy is convex, nor do we assume that the government optimizes on behalf of its citizens. We show that the same set of accounting prices should be used both for policy evaluation and for assessing whether or not intergenerational welfare along a given economic path will be sustained. We also show that a comprehensive measure of wealth, computed in terms of the accounting prices, can be used as an index for problems (2) and (3) above. The remainder of the paper is concerned with rules for estimating the accounting prices of several specific environmental natural resources, transacted in a few well known economic institutions.

The Economics Of Shallow Lakes

Ecological systems such as shallow lakes are usually non-linear and display discontinuities and hysteresis in their behaviour. These systems often also provide conflicting services as a resource and a waste sink. This implies that the economic analysis of these systems requires to solve a non-standard optimal control problem or, in case of a common property resource, a non-standard differential game. This paper provides the optimal management solution and the open-loop Nash equilibrium for a dynamic economic analysis of the model for a shallow lake. It also investigates whether it is possible to induce optimal management in case of common use of the lake, by means of a tax. Finally, some remarks are made on the feedback Nash equilibrium.

The Economics of Non-Convex Ecosystems: Introduction

The word “convexity” is ubiquitous in economics, but absent fromeconomics. In this paper we explain why, and show what differenceit makes to economic analysis if ecosystem non-convexities aretaken seriously. A simple proof is provided of the connectionbetween “self-similarity” and “power laws”. We also provide anintroduction to each of the papers in the Symposium and draw outthe way in which they form a linked set of contributions. Copyright Kluwer Academic Publishers 2003

The genuine savings criterion and the value of population

Summary. In any dynamic model of the economy with changing population, the latter should properly be one of the state variables of the system. It enters both in the maximand, at least under total utilitarianism, and into the production function in one way or another. If population growth is exponential and constant returns prevails, then a simple transformation to per capita variables can be used to eliminate one state variable, but this ceases to be true if growth is not exponential, as it obviously is not and cannot be. If the growth of population is exogenous, then introducing it into the system does not affect the optimal policy. However, if one asks whether the system is sustainable, in the sense of at least maintaining total welfare (integral of discounted utilities), then the criterion is that that the value of the rates of change of the state variables is non-negative, so that the shadow price of population becomes relevant. In this paper, we derive explicit formulas in a simple model, showing that the rate of growth of per capita capital is not the correct formula but must have another terms added to it. We also study the question under an alternative criterion of long-run average utilitarianism.

The Acid Rain Differential Game

This paper considers an acid rain differential game. Countries emit sulphur which is partly transferred to other countries. Depositions above critical loads ultimately destroy the soil. Countries face a trade-off between the costs of emission reductions and the damage to the soil due to the depletion of the acid buffers. Because of the transboundary externalities the outcome will depend on whether the countries cooperate or not. This paper presents the cooperative outcome and the open-loop and Markov-perfect Nash equilibria of the acid rain differential game. It will be shown that the depositions always converge to the critical loads but the steady-state levels of the buffer stocks differ. The theory is used to analyse the acid rain differential game for sulphur between Great Britain and Ireland. Finally, some results are given for the whole of Europe.

Environment and development : an economic approach

This book is a thoroughly revised text based on a report commissioned by the Swedish International Development Authority (SIDA). The financial grant from SIDA which made the work possible is hereby gratefully acknowledged. We gratefully accepted the offer from Kluwer Academic Publishers to revise the text. Hopefully, the text can be of interest to decision-makers, development programme personnel, teachers and the general public interested in how economics can contribute to better environmental decision-making. There are already many books on the market about environmental economics, some of them very good. What is special about this one? We do not claim to have obtained new results, but we have our own way of presenting the subject matter. In particular, we are of the opinion that policy failures are often overlooked as an obstacle to efficient environmental management. Although the main emphasis in this book is on project level analysis, it is essential that such analyses be linked to an understanding of the (dis)incentives for environmental improvements that general economic and particular environmental policies provide. Another essential feature of the book, although this is not unique, is the links provided between theory and empirical illustrations. We hope that this will illustrate to our readers the practical usefulness, but also the difficulties, of applying economics to environmental problems. In principle, this book can be read by anyone interested in the subject matter, without any formal education in economics. However, some background in microeconomic theory makes the reading easier.

Welfare economics and the environment

Publisher Summary This chapter describes environmental economics as seen from the standpoint of neoclassical welfare economics. It discusses theoretical framework for measurements of welfare effects of changes in the environment. This framework is founded on a “general equilibrium approach,” to environmental problems. The chapter thus gives a conceptual theoretical framework for environmental economics. This framework has been presented in mathematical form. The chapter discusses the concept of “Lindahl equilibrium.” It is the most natural correspondence in an economy with public goods to the “competitive equilibrium” in an economy without public goods. The traditional general equilibrium models discuss the case where all goods in the model are privately owned and sold and bought on perfect markets. The chapter reviews that equilibrium in such an economy has some very desirable properties, the most important being that it is Pareto efficient, that is, there are no other feasible allocations in the economy that are more desired by some individuals but not less desired by all others. Finally, three approaches are discussed in the chapter: (1) to ask people about their willingness to pay for environmental services, (2) to make assumptions on preferences that will enable one to derive the utility function over environmental services from the demand functions for private goods, and (3) to make assumptions that imply that the value of some environmental services is capitalized in the price of some private goods.

The acid rain game as a resource allocation process with an application to the international cooperation among Finland, Russia and Estonia

The authors consider optimal cooperation in transboundary air pollution abatement among several countries under incomplete information, i.e., local information only on marginal emission abatement costs and damage costs. Directions of emission abatement in each country are determined that generate a succession of emissions programs shown to converge to an economic optimum. A cost sharing scheme, which results from appropriately designed international transfers, guarantees that the individual costs of all parties are nonincreasing along the path towards the optimum. A version of K. G. Maalers (1989) acid rain game is used for a numerical application. Copyright 1995 by The editors of the Scandinavian Journal of Economics.