Evaluating Projects in a Dynamic Economy: Some New Envelope Results

Abstract

This paper is concerned with the modern theory of social cost-bene.t 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-bene.t rules for evaluating a small project. In particular, we show that the direct change in net national product (NNP) quali.es as a convenient welfare index without involving any other induced side e¤ects. 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.dynamic cost-bene.t analysis; net national product; project evaluation; welfare index