WEALTH FROM OPTIMAL HEALTH

Recently, much research has been devoted to the question of how the conventional net national product measure should be augmented so as to cover changes in the stocks of natural resources. This paper investigates the treatment of health (capital) and the risk of 'doomsday' caused by pollution in such welfare measures. Our problem is not a standard optimal control problem because the survival probability depends on state variables. We show how to handle this complication. The resulting welfare measure is contrasted with the conventional net national product measure. Finally, we address the matter of how to design a subsidy on health investment such that a market economy provides the optimal level of health.