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The water and diamond paradox and green NNP as a welfare indicator

Li, C. Z., K.-G. Löfgren. (2014) Environmental Economics 5(2):30-36.


A classical structure that is used to analyze the water and diamond paradox provides an intuitive underpinning to the modern theory of welfare measurement in a growth context. John Law’s and Adam Smith’s concepts of value-in-use and value-in-exchange have modern aggregated counterparts. Complemented with Dupuit’s extension in terms of a utility function with a declining marginal utility, they are close to enough to provide the intuition behind important aspects of modern dynamic welfare measurement. We answer four modern questions: (1) Will an increase in the level of NNP indicate a welfare improvement? (3) Will NNP growth indicate a local welfare improvement? (3) If the answers to (1), (2) are no, what are the underlying reasons? (4) How do the correct welfare indicators look like? At least Dupuit, as an inventor of the consumer surplus, may perhaps have agreed with some of the answers to the modern dynamic approach.

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Keywords: the water and diamond paradox, green NNP, welfare measurement

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