SUMMARY Does economic growth increase social welfare (happiness)? Answers to such questions can only be provided by a complete analysis of all the objective, subjective, and institutional effects. All measures originate from the subjective world, working through the institutional setting to affect the objective world, the institutional setting and/or the subjective world. Due to the increasing complexity of the modern society, it is likely that more problems are going to involve significant institutional and subjective effects, making a complete multidisciplinary study more necessary. As an introduction to this argument, the Harrod‐Hirsch concept of positional goods and its implications on the desirability of economic growth are analysed geometrically and extended. A simple method to reduce the difficulty of comparability in happiness surveys is also suggested.

The pricing and investment policies of a public enterprise should be designed to achieve efficiency since equity is better pursued by general policy regarding income distribution. Short-run marginal-cost pricing does not generally lead to long-term deficit, but may involve price and surplus/deficit cycles for the case with lumpy investments and growing demand, where the price increases with demand but is reduced with capacity expansion. Taking account of the extra costs of government revenue collection and the likely average price/cost ratio in the economy, the third-best pricing policy is likely to result in long-term surplus, making the objectives of equity, efficiency and financial viability much more consistent with each other than is generally believed. This is particularly true for water with historically increasing costs of additional sources of supply. Copyright 1987 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.

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