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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
output and prices of private goods. These latter costs need to be identified, but one must have an accounting system that makes sure that environmental effects are not double counted. While this is an illustration of air pollution effects, there exists, more generally, a complex interweaving of environmental changes, economic production, and consumption.
In summary, estimating the effect of environmental conditions on economic welfare, despite some overlap, will typically involve quite different types of analysis and estimation than that associated with the estimation of a COGI or COLI restricted to the domain of private goods. Most importantly, estimates of the effect of environmental changes on national output, income, and prices must be embedded in a consistent accounting framework that takes account of stocks and flows and outputs and prices and distinguishes the effects of the environment on various categories of human and economic activity.
In recent years the U.S. Department of Commerce’s Bureau of Economic Analysis has been engaged in a long-run effort to construct “satellite” accounts that would gradually extend, on an experimental basis, the domain of the government’s official measures of national output and income. A recent National Research Council (1999) report provides a highly useful discussion of the challenges, difficulties, and promises of this endeavor. Any research program of the BLS to develop experimental measures that substantially expand the domain of its various price indexes should be carried out in close concert and coordination with the BEA effort.
OTHER DOMAIN ISSUES
Taxes and Government Programs
Governments, particularly state and local governments, use sales taxes and similar levies to finance part of their expenditures. Such taxes tend to be passed along to consumers in the form of higher prices.8 As a consequence, an increase in the average rate of the sales tax throughout the country tends to raise, and a decrease to lower, the CPI. But as pointed out by Nordhaus (1997), the direct contribution of the education, roads, and other public goods to households’ standards of living is not captured by the CPI as an offset against the taxes. As a result, the CPI tends to overstate the rise in the cost of living when sales tax rates
In the national income accounts the category of government revenues labeled “indirect business taxes” includes not only sales taxes and customs duties, which are typically passed along in higher prices, but also state and local property taxes, whose incidence is less clear and that in the short to medium run are more likely to be borne by property owners. In the text we use the term sales taxes to cover indirect business taxes, excluding those levied on (land and structure) property.