This paper considers the problem of policy evaluation in a modern society with heterogeneous agents and diverse groups with conflicting interests. Several different approaches to the policy evaluation problem are compared including the approach adopted in modern welfare economics, the classical representative agent approach adopted in macroecononomics and the microeconomic treatment effect approach. A new approach to the policyevaluationproblemis developed and applied that combines and extends the best features of these earlier on the importance of heterogeneity is presented. Using an empirically based dynamic general equilibrium model of skill formation with heterogeneous agents, the benefits of the more comprehensive approach to policy evaluation are examined in the.
