Welfare measurement and the health environment

An important issue in environmental economics is to augment the conventional net national product measure so as to cover changes in stocks of natural resources. In this paper, the authors show how to treat health (capital) effects in welfare measures caused by, for example, pollution. They also show the effects the risk of ‘doomsday’ caused by pollution has on these measures. A Ramsey growth model enlarged with health capital and death risks is used to derive an augmented welfare measure. A way of solving the particular technical problem one faces when the death risk depends on a state variable (health capital) is also presented. This measure is contrasted with the conventional net national product measure. The authors also briefly discuss the welfare properties of a market economy when individuals invest in health capital but face a strictly positive death risk.