Evaluating Projects in a Dynamic Economy: Some New Envelope Results

This paper is concerned with the modern theory of social cost-bene.t analysis in <p> a dynamic economy. The theory emphasizes the role of a comprehensive, forward- <p> looking, dynamic welfare index within the period of the project rather than that <p> of a project.s long-term consequences. However, what constitutes such a welfare <p> index remains controversial in the recent literature. In this paper, we attempt to <p> shed light on the issue by deriving three equivalent cost-bene.t rules for evaluating a <p> small project. In particular, we show that the direct change in net national product <p> (NNP) quali.es as a convenient welfare index without involving any other induced <p> side e¤ects. The project evaluation criterion thus becomes the present discounted <p> value of the direct changes in NNP over the project period. We also illustrate the <p> application of this theory in a few stylized examples.