Money Metric Measures of Individual and Social Welfare Allowing for Environmental Externalities

Even with environmental externalities, money metric measures of individual welfare can often be constructed by methods similar to those of Vartia (1983), provided that individual’s willingness to pay functions are known. Satisfactory money metric measures of social welfare are harder, however. Following Feldstein (1974) and Rosen (1976), a “uniform” money metric measure is proposed, based on the uniform poll subsidy (or tax) to all individuals which produces the same gain (or loss) in social welfare. Finally, problems with the definition of such measures when faced with “environmental catastrophe” are discussed. Acknowledgements This is a minor revision of European University Institute Working Paper ECO No. 90/19, October 1990. I am grateful to Charles Blackorby and to seminar participants at the Universities of Karlsruhe, London (University College), Rome (La Sapienza), Venice, Bologna, Milan (Sacro Cuore) and California at Riverside for helpful discussion and suggestions.