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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
morbidity from technological advances in medicine? Should it seek to incorporate the improvement in living standards that might accompany the introduction and gradual spread of mass merchandising and discount stores, including an explicit adjustment for associated differences in retail service quality and shoppers’ time? The conceptual background for considering many of these questions was explored in Chapter 2, and they are discussed in more detail, together with recommendations, in Chapters 5 and 6. In the last part of this chapter we briefly deal with issues related to the treatment of certain goods furnished by government and by private employers (fringe benefits).
A cost-of-living index that seeks to include the status of the social and physical environment and government-provided public goods must measure the effects of changes in those variables on consumer welfare. That is, it must measure the expenditures necessary to maintain a given standard of living, taking into account the value to consumers—positive or negative—flowing from changes in those variables.
Correspondingly, an expanded measure of changes in national output would include the value of changes in the provision of goods by government and, with the appropriate sign, the value of any changes in the flow of damages from various kinds of environmental “bads,” weighted by their implicit prices.4 Increases in pollution, crime, congestion or other environmental damages, arising chiefly from human activity, would reduce the expanded output measure, while activities (such as pollution controls) that reduced these damages and whose benefits were greater than their costs, would raise the augmented output measure.
Although there are major difficulties that have to be overcome in defining and then measuring the relevant quantities of many environmental and government-provided public goods, the problems encountered in assigning values to these goods are truly formidable. The fundamental difficulty stems from the fact that not only the goods provided by government but also most environmental goods are public goods. Public goods, such as clean air, have the characteristic that if they are available to one person they are available to all—globally, nationally, or regionally—whether or not particular individuals desire to purchase them. Only to a limited extent can individuals choose how much clean air or safety against crime they want to pay for and consume. They can purchase home security systems to reduce their risk from crime or install water filters to increase the
Changes in government-provided goods and in environmental damage that result in changes in productivity and costs in the production of private goods are already reflected in the conventionally measured gross domestic product (GDP). Damages that show up directly as reduced consumer welfare—e.g., higher rates of respiratory disease from air pollution—would have to be separately identified and accounted for.