Sustainable Economic Growth with Linear Resource Regeneration

Abstract

Until now we have focused on intergenerational efficiency as benchmark for the social evaluation of market allocation. As mentioned in the first chapter, since the 1970s the focus of resource policy turned from intergenerational efficiency to intergenerational equity, i.e. sustainability from an economic point of view. After the first oil price shock, the sustainability of economic growth (income per capita) under exhaustible (or non-renewable) became the main matter of concern. Regarding the feasibility of sustainability, we know from Chap. 2 that a constant standard of living is possible in the presence of exhaustible resources, even in the absence of technological change, provided that man-made capital and exhaustible resources are ‘good’ substitutes in production, and that resource owners invest sufficiently in reproducible capital so as to offset the optimally declining stock of natural resources and to achieve economic sustainability. However, this condition, known as the Hartwick (1977) rule, is derived from intertemporal equilibrium models of the infinitely-lived agent (ILA) type which ignore ‘generation overlap and treat society in each period as a single generation which cares about (and also discounts) the welfare of its immediate descendants and which has complete control over the rate of resource use and the saving rate’ (Mourmouras, 1991, 585).