Econ II - Session 12 Flashcards
Main finding of The Limits to Growth
+ Critisism of the study
Environmental limits cause collapse of the world economy by mid 21st century, followed by mass starvation
Prices will in crease by declining availability of non-renewable resource
Responses to price signals when resource limits are approached
- Innovation: New energy resources
- Innovation: technological advances for more efficient use
- Behavioral changes
- Reduction in overall consumption: de-growth
What is ‘de-growth’?
Political, economic, and social movement based on ecological economics, anti-consumerism and anti-capitalist ideas
Why is de-growth as a climate policy very expensive?
What’s the solution therefore, then?
Reducing GDP by 1% to achieve a 1% reduction of CO2 emissions implies a carbon price of about US$ 2000/ ton CO2
Solution: De-couple growth from resources, rather than de-growth.
What is sustainibility (about)?
+ Brundtland definition
+ Arrow et al. definition
Respecting the (natural) boundaries of planet earth
Brundtland:
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs
Arrow et al.:
Intertemporal welfare must not decline over time.
Weak vs strong sustainability
Weak sustainability:
Resources can be substituted by produced capital.
Strong sustainability:
Natural capital cannot be substituted indefinitely.
DHSS model
+ Main finding
+ Result
Same as Ramsey that output (GDP) is produced from capital stock that can accumulate.
Difference: Producing output also requires a natural, exhaustible, non-renewable resource of a limited stock that can deplete (such as oil).
Main finding: It depends on the substitutability of the two production factors whether long-term economic growth is possible and desired.
Result:
- Optimal resource extraction pathway (and resource price)
- The model introduces a depleting factor of production: an exhaustible (non-renewable) resource
How will GDP develop?
+ Formula
GDP is produced from both capital and the resource. Capital can accumulate, the resource will deplete
Y = Y(K,R)
–> Two opposed forces are at work
Is growth possible in the DHSS model?
Depends on the substitutability between physical capital and the non-renewable resource.
What’s the Hotelling Rule? What does it say?
- Result derived from the DHSS model
- Price of a limited resource should increase exponentially
- Condition for resource pricing in the optimal extraction (and growth) path
Why do oil prices not follow the Hotelling Rule?
new discoveries (deep sea, shale oil)
Hartwick Savings Rule
How to achieve non-declining consumption:
Invest all resource rents in reproducible capital (human & physical).
Cobb Douglas production function
+ what does it tell us
Y = K ^(𝛼) ⋅ L ^(𝛽) ⋅ R ^(1- 𝛼 -𝛽)
Constant consumption is feasible if in GDP the capital share is greater than resource share
That is if 𝛼 > 1 − 𝛼 − 𝛽
