Grantee Research Project Results

1997 Progress Report: Environmental Values and National Economic Accounts

EPA Grant Number: R824671
Title: Environmental Values and National Economic Accounts
Investigators: Flores, Nicholas E.
Institution: University of Colorado at Boulder
EPA Project Officer: Chung, Serena
Project Period: October 1, 1995 through June 1, 1997 (Extended to November 1, 1997)
Project Period Covered by this Report: October 1, 1996 through June 1, 1997
Project Amount: $43,395
RFA: Valuation and Environmental Policy (1995) RFA Text |  Recipients Lists
Research Category: Environmental Justice

Objective:

In recent years there has been considerable discussion over the usefulness of national economic accounts such as Gross National Product, Gross Domestic Product, and Net National Product in gauging economic growth and its contribution to social welfare. The most noted shortcomings of these account measures are their failure to explicitly recognize the contribution of the environment to overall welfare. Numerous suggestions for revising or supplementing the existing set of national economic accounts are found in the literature. Our project goal is to conduct an analysis of the proposed revisions and identify potential strengths and weaknesses.

The approach we have taken is to develop a basic theoretical model using economic preference and production theory to determine the environment's contribution to overall economic welfare. The fundamental reason inefficient resource use arises is the lack of markets for most environmental goods. The lack of markets for these goods gives rise to inconsistent economic signals received by producers, whose actions may negatively affect the environment, and consumers, whose welfare is positively affected by environmental quality. Our model has two prominent dynamic features that influence the allocation of resources. First, man-made capital stock, net of depreciation, carries over into future periods and determines future production possibilities. Second, the stock of environmental goods, net of depreciation, also carries over into future periods and provides service flows that contribute to production and consumer welfare. In a departure from existing analyses, we examine the potential public goods nature of environmental goods that arises due to non-use values; technological improvement as well as shifts in preferences that may occur over time; and in some cases, changes to the environment that are irreversible.

Progress Summary:

Our preliminary findings suggest that even when the environment is properly priced in accordance with consumer preferences and producer technologies, some adjusted measures provide little insight into how welfare adjusts with time. Under certain circumstances, adjusted measures may in fact provide the wrong signal, in that the adjusted account may show an increase over time while welfare has instead declined. In cross-country comparisons, environmentally adjusted, net consumption measures will, in many cases, preserve the ordering provided by existing accounts that ignore the environment's contribution to the economy. With regard to policy implications, our preliminary results suggest that even when environmental values are correctly measured and accounts are adjusted accordingly, the measures should be interpreted with caution. If environmentally adjusted economic accounts are to become an integral part of decision makers' information sets, the potential shortcomings of these accounts need to be recognized as well.

Future Activities:

The basis of most account adjustment recommendations is a dynamic model that correctly incorporates the environment into economic decisions. In reality, welfare evolves in an inefficient fashion due to the lack of markets for environmental goods. Our next step in the project will be to conduct numerical simulations of a simple dynamic economy as described by the theoretical model. This numerical modeling exercise should yield insight into how well various adjusted account measures reflect changes in welfare over time under the condition of missing markets.

Journal Articles:

No journal articles submitted with this report: View all 1 publications for this project

Supplemental Keywords:

RFA, Scientific Discipline, Economic, Social, & Behavioral Science Research Program, Economics & Decision Making, Economics, Ecology, decision-making, Social Science, Ecology and Ecosystems, economic objectives, public values, theoretical analysis, public issues, public resources, valuing environmental quality, ecosystem valuation, policy analysis, social welfare, incentives, environmental values, public policy, natural resources, decision analysis, human welfare, national income accounting, valuation, environmental assets

Progress and Final Reports:

Original Abstract

1996

Final Report