On the Generalized Weitzman's Rule

Weitzman (1976) provides a foundation for net national product of a competitive economy as the annuity equivalent of the present discounted value of maximized consumption. This paper considers how Weitzman's rule should be modified if the competitive equilibrium is affected by the presence of market distortions. The paper first examines the model with external effects of capital in which there are spillovers of knowledge. The paper also studies the model with policy interventions where the policy maker seeks the second best allocation. The central concern of the paper is to elucidate the factors that generate a divergence between net national product and the welfare equivalence of maximized consumption. In discussing each model, the paper presents a typical example that has been widely discussed in the literature.