Some Unpleasant Natural Resource Accounting Arithmetic: The Welfare Inconsitency of

M. Harris

No 765, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: Advocates of natural resource accounting argue for the revision and refonnulation of national accounting practices in order to better account for the depletion and degradation of a nation's resource stocks and environmental assets. The literature is predicated on three key assumptions: that national income is an important policy variable ("social objective function"); that current accounting practices are poorly designed as social objective functions and lead to bad policy-making; and that improving the construction of key accounting aggregates will result in improvements in policy decisions and outcomes. The purpose of this paper is to examine the third of these claims. I introduce the "we1fare-consistency" criterion, which is satisfied when changes in a "comprehensive income" measure are positively correlated with changes in welfare. A series of simple counter-examples in a cake-eating economy is presented to show that this criterion is not generally satisfied by modifications proposed in the resource accounting literature. The divergence between income and welfare is explicable in tenns of consumer surplus, which plays a role in welfare but not in income. An example using renewable resources is also presented to show that sustainable equilibria may not be welfare-consistent.

Keywords: NATURAL RESOURCES; ENVIRONMENT; STOCKS (search for similar items in EconPapers)
JEL-codes: H30 Q20 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2000
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