Welfare Measurement in Imperfect Markets, by Thomas Aronsson, Karl-Gustaf Löfgren and Kenneth Backlund

Edward Elgar, 2004, viii + 196 pp, hardback, 1 84064 779 5, £59.95 Order this book

If you are interested in the way in which we keep our national accounts (whether or not you believe that GDP and GNP are useful measures), and if you have some understanding of economic theory, then this book will interest you.

Traditional measures tell us how much has been paid for goods and services and how much has been spent on physical capital. The authors’ view is that “a comprehensive concept of consumption should reflect consumer preferences, and not be restricted to conventional goods and services; it would also be likely to include other ‘utilities’ such as leisure and environmental quality” (p.1). (Why the quotation marks around ‘utilities’? Leisure and a sustainable environment are utilities). “Similarly, a comprehensive measure of net investments should include all capital formation undertaken by society and not merely changes in the stock of physical capital” (p.1). The book is a detailed exploration of this ‘national product related welfare measures’ or ‘Green Net National Product’ agenda.

Market failure and the effect of environmental damage are constant and important themes, and chapter 6 is a useful discussion of the difficulties facing green accounting and green taxation in a world in which taxation is a national responsibility and pollution a global problem. Unsurprisingly, chapter 8 concludes that “even if aggregate consumption has the desired levels, green NNP in utility terms will fail on a welfare measure when the distribution of consumption is suboptimal. Therefore, a suboptimal distribution across agents affects the welfare measure in the same way as other market imperfections” (p.147).

The mathematical models employed by the authors are applied to such notions as ‘taxation’, ‘welfare’ and ‘pollution’. Whilst the mathematical models might be detailed and informative, the real welfare economy is in fact full of much smaller detail. The detail of tax and benefits systems has a considerable effect on welfare, and it would be interesting to see the authors apply their models to such issues as the impact of means-testing on welfare measures.