Green accounting and the welfare gap

Although gross domestic product (GDP) is not intended to be a measure of so cietal welfare, it is often used as such. One shortcoming as a welfare meas ure is that it fails to account for the non-marketed value of natural resou rce flows. The difference between societal welfare and GDP is labelled the 'welfare gap'. A model that accounts for both market and non-market income flows from natural capital is used to examine this gap. Societal welfare de pends on private goods and the stock of natural capital. The latter is subj ect to a logistic growth relationship common to many non-human species. Pri vate goods are produced using human capital and flows of natural capital. A n exogenously growing human population either harvests the natural resource , produces human capital or produces the private good. Optimal control theo ry and dynamic simulations provide steady-state harvest and human capital g rowth rates which determine the steady-state natural resource stock, GDP an d societal welfare growth rates. The model illustrates the feasibility of e xplicitly accounting for ecological relationships in economic growth models and shows that, depending on one's preferences and the growth rate of huma n population and the intrinsic growth rate of natural resources, GDP may di verge substantially from the growth rate of societal welfare, leaving a lar ge welfare gap. (C) 1999 Elsevier Science B.V. All rights reserved.