Fluent Essays

Please write three, separate, 400 word essays that address the following concepts. Be sure to discuss the concepts themselves as well as the relationship between the concepts. You will want to include graphs, diagrams and figures to help illustrate key concepts. Please be sure to use other sources of information as needed. It is very important that you properly reference your sources of information. Cite your sources cannot be overemphasized. Always give credit where credit is due! a) Economic Efficiency and Markets b) Externalities and Environmental Problems c) Social Costs and Private Costs sustainability_an_eonomists_perspective.pdf the_environment_and_economics.pdf problem_of_market_failure.pdf divegences_between_social_costs_and_private_cost.pdf the_economic_approach.pdf sustainability_an_eonomists_perspective.pdf Unformatted Attachment Preview 11 Sustainability: An Economists Perspective ROBERT M. SOLOW Robert M Solow is Institute Professor of Economics at the Massachusetts Institute of Iechnology and a Nobel Laureate in Economics Ihis talk is different from anything else anyone has heard at Woods :Efole; ceitainly for the last two days.. Three people have asked me, Do you plan to use any transparencies or slides? Three times I said, No, and three times I was met with this blank stare of disbelief. I actually have some beautiful aezial photographs of Prince William Sound that I could have brought along to show you, and I also have a spectacular picture of Michael Jordan in full flight that you would have liked to have seen. But in fact I dont need or want any slides or transparencies I want to talk to you about an idea. The notion of sustainability or sustainable growth (although, as you will see, it has nothing necessa,ily to do with growth) has infiltrated discussions oflong-run economic policy in the last few yearn It is very hard to be against sustainability. In fact, the less you know about it, the better it sounds. Ihat is true of lots of ideas. The questions that come to be connected with sustainable development or sustainable growth 01 just sustainability are genuine aod deeply felt and very complex. The combination of deep feeling and complexity breeds buzzwords, and sus­ tainability has ceztainly become a buzzword.. What I thought I might do, when I was invited to talk to a group like this, was to try to talk out loud about how one might think straight about the concept of sustainability, Ibis paper was presented as the Eighteenth J. Seward Johnson Lecture to the Maline Policy Center, Woods Hole Oceanographic Institution, at Woods Hole, Massachusetts, on June 14, 1991. 179 180 SOLOW what it might mean and what its implicatlons (not for daily life but for your annual vote or your concern for economIC policy) might be. Definitions are usually boring. That is probably true here too. But here it matters a Jot. Some people say they dont know what sustainability means, but it sounds good. Ive seen things on restaurant menus that strike me the same way. I took these two parts of a definition from a UNESCO ctoCument: .. , every generation should leave water, air and soil resources as pure and unpolluted as when it came on earth. Alternativeiy, it was suggested that each generation should leave undiminished all the species of animals it found existing on earth. I suppose that sounds good, as it is meant to. But I believe that kind of thought 1s fundamentally the wrong way to go in thinking about this issue. I must also say that there are some much more carefully thought out definitions and discussions, say by the U.N. Enviromuent Programme and the World Conservation Union. They all turn out to be vague; m a way, the message I want to leave with you today is that sustainability is an essentially vague concept, and it would be wrong· to think of it as being precise. or even capable of being made precise. It is therefore probably not m any clear way an exact guide to policy. Nevertheless. it is not at all useless. Pretty cJeariy the notion of sustainability is about our obligation to the future. It says something about a moral obligation that we are supposed to have for future generations. I think 1t is very unportant to keep in nund-lm talking like a philosopher for the next few sentences and I dont really know how to do that-that you cant be morally obligated to do something that is not feasible. Could I be morally obligated to be like Peter Pan and flap my wings and fly around the room? The answer is cleariy not. I cant have a morai obligation like that because I am not capable of flapping my arms and flymg around the room. lfl fail to carry out a moral obligation, you must be entitled to blame me. You could properly say unkind things about me. But you couldnt possibly say unkind things about me for not flying around the room like Peter Pan because you know, as well as I do, that I cant do it. If you define sustainability as an obligation to leave the world as we found it m detail, I think thats glib but essentially unfeasible. It 1s, when you think about it, not even desirable. To carry out literally the injunction of UNESCO would mean to make no use of mineral resources: it would mean to do no permanent construction or semi-permanent construction; build no roads; build no dams; build no piers. A moormg would be all nght but not a pier. Apart from bemg essentially an injunction to do something that is not feasible. it asks us to do something that is not, on reflection, desirable. I doubt that I would feel myself better off if I had found the world exactly as the Iroquois left 1t. It is not dear that one would really want to do that. To make something reasonable and useful out of the idea of sustaina­ bility, I think you have to try a different kind of definition. The best thing Sustainability: An Economists Perspective 181 I could think of is to say that it is an obligation to conduct ourselves so that we leave to the future the option or the capacity to be as well off as we are. It is not ciear to me that one can be more precise than that. Sustainability is an injunction not to satisfy ourselves by impoverishing our successors. That sounds good too. but I want you to realize how problematic it is-how hard it is to make anything precise or checkable out of that thought. If we try to look far ahead; as presumably we ought to ifwe are tiying to obey the injunction to sustainability, we realize that the tastes, the preferences, of future generations are something that we dont know about. Nor do we know anything very much about the tech­ nology that will be available to people 100 years from now. Put yourself in the position of someone m 1880 trying to 1magine what life would be like in 1980 and you will see how wrong you would be. I think all we can do in this respect is to imagine peopie in the future being much like ourselves and attributing to them. imputing to them, whatever technology we can reasonably extrapolate--whatever that means. I am trying to emphasize the vagueness but not the mean1ngiess of that concept. It is not meaningless, it is Just inevitably vague. We are entitled to piease ourselves, according to this definition, so long as it 1s not at the expense (in the sense that I stated) of future well-being. You have to take into account, in thinking about sustainability, the re­ sources that we use up and the resources that we ieave behind, but aiso the sort of environment we leave behind including the built environment, including productive capacity (plant and equipment) and including tech­ nological knowledge. To talk about sustainability tn that way is not at all empty. It attracts your attention, first, to what history tells us 1s an impor­ tant fact, nameiy, that goods and services can be substituted for one another. If you dont eat one species of fish, you can eat another species of fish. Resources are, to use a favorite word of economists, fungible in a certain sense. They can take the place of each other. That is extremeiy important because it suggests that we do not owe to the future any particu­ lar thing. There is no specific object that the goai of sustainability, the obligation of sustainability, requires us to leave untouched. What about nature? What about wilderness or unspoiled nature? I think that we ought, 1n our policy choices, to embody our desire for unspoiled nature as a component of well-being. But we have to recognize that different amenities really are, to some extent. substitutable for one another, and we should be as inciusive as possible in our calcuiations. It is perfectiy okay, it is perfectly Iogicai and rational, to argue for the preservation of a particular species or the preservation of a particular landscape. Bnt that has to be done on its own, for its own sake, because this landscape is intrinsically what we want or this species is intrinsically important to preserve, not under the heading of sustamability. Sustama­ bility doesnt require that any parttcular species of owl or any particular species offish or any parttcular tract of forest be preserved. Substitutabil- 182 SOLOW ity 1s also important on the production side. We know that one kind of input can be substituted for another 1n production. There is no reason for our society to feel guilty about using up aluminum as Jong as we ieave behind a capacity to perform the same or analogous functions usmg other kinds of materials-plastics or other natural or artificial materials. In making policy decisions we can take advantage of the principle of substitu­ tability, remembenng that what we are obligated to leave behind 1s a generalized capacity to create well-being, not any partlclllar thing or any particular natural resource. If you approach the problem that way in trymg to make plans and make policies, it is certain that there will be mistakes. We will impute to the future tastes that they dont have or we will impute to them technologi­ cai capacities that they wont have or we will fail to impute to them tastes and technologicai capacities that they do have. The set of possible mis­ takes is usually pretty symmetric. That suggests to me the importance of choosing robust policies when­ ever we can. We should .choose pOlicies that will be appropriate over as wide a range of possible circumstances as we can imagine. But it would be wrong for policy to be paralyzed by the notion that one can make mis­ takes. Liability to error is the Jaw of life. And, as most people around Woods Hole know, you choose policies to avoid potentially catastrophic errors, if you can. You insure wherever you can, but thats it. The way I have put this, and I meant to do so, emphas12es that sustama­ bility 1s about distributional eqmty. It is about who gets what. It is about the sharmg of well-bemg between present people and future people. I have also emphasized the need to keep in mind, 1n making plans, that we don;t know what they will do, what they will like, what they will want. And, to be honest. it is none of our business. It is often asked whether, at this level, the goal or obligation of sustain­ ability can be left entirely to the market. It seems to me that there is no reason to believe in a doctrinaire way that it can. The future is not adequately represented in the market, at least not the far future. If you remember that our societies live with real interest rates of the order of 5 or 6 percent, you will realize that that means that the dollar a generation from now, thirty years from now, 1s worth 25 cents today. That kinct of discount seems to me to be much sharper than we would senously propose in our public capacity, as citizens thinking about our obligation to the future. It seems to me to be a stronger discount than most of us would like to make. It is fair to say that those people a few generations hence are not adequately represented in todays market. They dont participate 1n it, and therefore there is no doctrinaire reason for saymg, Oh well, ordinary suppiy and demand, ordinary market behavior, will take care of whatever obligation we have to the future. Now, in principle, government could serve as a trustee, as a representa­ tive for future mterests. Policy actions, taxes, subsidies, regulations could, Sustainability: An Economists Perspective 183 in principie, correct for the excessive present-mindedness of ordinary peo­ pie like ourselves in our daily business. Of course, we are not sure that government will do a good Job. It often seems that the rate at which governments discount the future is rather sharper than that at which the bond market does. So we cant be sure that public policy will do a good job. That 1s why we talk about 1t m a democracy. We are trying to think about collective decisions for the future, and discussions like this, not with just me talking, are the way 1n which policies of that kind ought to be thrashed out. Just to give you some idea of how uncertam both private and public behavior can be in an issue like this, let me ask you to think about the past, not about the future. You could make a good case that our ancestors, who were considerably poorer than we are, whose standard of living was considerably less than our own, were probably excessively generous in providing for us. They cut down a iot of trees, but they saved a iot and they built a lot of railroad rights-of-way. Both privately and publicly they probably did better by us than a sort of fair-mmded Judge in thinking about the equity (whether they got their share and we got our share or whether we profited at their expense) would have required. It would have been okay f6r them to save a littie less, to enjoy a little more and given us a little less of a start than our generation has had. I dont think there is any S!Illple generalization that will serve to guide policy about these issues. There is every reason to discuss economic policy and social policy from this pomt of view, and anything else is likely to be ideology rather than analysis. Once you take the pomt of view that I have been urging on you in thinking about sustainability as a matter of distributional equity between the present and the future, you can see that it becomes a problem about saving and investment. It becomes a problem about the choice between current consumption and providing for the future. There is a sort of dual connection-a connection that need not be intrinsic but is there-between environmental issues and sustainability issues. The environment needs protection by public policy because each of us knows that by burdening the envrronment, by damaging it, we can profit and have some of the cost, perhaps most of the cost, borne by others. Sustainability is a problem preciseiy because each of us knows or realizes that we can profit at the expense of the future rather than at the expense of our contemporaries and the environment. We free-ride on each other and we free-ride on the future. Environmental policy is important for both reasons. One of the ways we free-ride on the future is by burdening the environment. And so current environmentai protection-this is what I meant by a dual connection­ will almost certainly contribute qmte a Jot to sustamability. Although, I want to warn you, not automatically. Current envJronmental protection contributes to sustamability if it comes at the expense of current consmnp- 184 SOLOW tion. Not if it comes at the expense of investment, of additions to future capacity. So, there are no absolutes. There is nothing precise about this notion but there are perhaps approximate guides to public policy that come out of this way of reasoning about the idea of sustamability. A correct pnnciple, a correct generai guide is that when we use up some­ thing-and by we I mean our society, our country, our civilization, how­ ever broadly you want to think-when we use up something that is irre­ placeable, whether it is minerals or a fish species. or an environmental amenity, then we should be thinking about providing a substitute of equal value, and the vagueness comes in the notion of vaiue. The something that we provide in exchange could be knowledge, could be technology. It neednt even be a physical object. Let me give you an excellent example from the recent past of a case of good thought along these lines and also a case of bad thought along these lines. Commercially usable volumes of oil were discovered in the North Sea some years ago. The two main beneficiaries of North Sea oil were the United Kingdom and Norway. It is only right to say that the United Kingdom dissipated North Sea oil, wasted it, used it up in consumption and on empioyment. If I meet Mrs. Thatcher in heaven, since.that is where I intend to go, the biggest thing I will tax her with is that she blew North Sea oil. Here was an asset that by happenstance the U.K. acqmred. If the sort of generai approach to sustainability that I have been suggesting to you had been taken by the Thatcher government, someone would have said, Its okay we are going to use up the oil, thats what it is for, but we will make sure that we provide something else m exchange, that we guide those resources, at least 1n iarge part, into investment in capacity 1n the future. That did not happen. As I said, if you ask where (and by the way the curve of product10n from the North Sea fields is already on the way down; that asset is on its way to exhaustion) it went, it went into maintain­ ing consumption Ill the United Kingdom and, at the same time, into unemp!Oyment. Norway, on the other hand, went about it in the typical sober way you expect of good Scandinavians. The Norwegians said, here is a wasting asset. Here is an asset that we are going to use up. Scandinavians are also slightly masochistic, as you know. They said the one thing we must avoid is blowmg this; the one thing we must avoid 1s a binge. They tried very hard to convert a large fraction of the revenues, of the rentals, of the royalties from North Sea oil into investment. I confess I dont know how well they succeeded but I am willing to bet that they did a better Job of it than the Umted Kingdom. This brings me to the one piece of technical economics that I want to mention. There is a neat anaiytical resuit in economics (mainly done by John Hartwick of Queens University in Canada) ·which studies an econ­ omy that takes what we call the rentais, the pure return to a non-renewable 185 Sustainability: An Economists Perspective 1 resource, and invests those rentals. That is, it uses up a naturai asset like the North Sea oil field, but makes a point of investing whatever revenues intrinsically inhere to the oil itself. That policy can be shown to have neat sustainability properties. In a simpie sort of economy, it will guarantee a perpetually constant capacity to consume. By the way, it is a very simpie rule, and it is really true only for very simple economies; but it has the advantage, first of all, of sounding right, of sounding like JUstice, and secondly, of be1ng practical. It is a calculation that could be made. It is a calculation that we dont make and I am going to suggest in a minute that we should be making it. You might want to do better. You might feel so good about your great-grandchildren that you would like to do better than invest the rents on the non-renewable resources that you use up. But in any case, it is, at a minimum, a policy that one could pursue for the sake of sustainability. I want to remind you again that most environmentai pro­ tection can be regarded as an act of investment. If we were to think that our obligation to the future is in principle discharged by seeing that the return to non-renewable resources is funnelled into capital formation, any kind of capital formation-plant and eqmpment, research and develop­ ment, physical oceanography, economics or environmental investment­ we could have some feeling that we were about on the right track. Now I want to mention what strikes me as sort of a paradox-as a difficulty with a concept of sustainability. I said, I kind of insisted, that you should think about it as a matter of equity, as a matter of distribu­ tional equity, as a matter of choice of how productive capacity should be shared between us and them, them being the future. Once you think about it that way you are almost forcea logically to think about equity not between periods of time but equity right now. There is something incon­ sistent about peopie who profess to be terribly concerned about the wel­ fare of future generations but do not seem to be terribly concerned about the welfare of poor people today. You will see 1n a way why this comes to be a paradox. The only reason for thinking that sustamability is a problem is that you think that some peopie ... Purchase answer to see full attachment