EC238 Lecture Notes - Lecture 19: Natural Capital, Marginal Cost, Demand Curve
Document Summary
Sustainability criterion future generations should be left no worse off than current generations and should perhaps be left better off are efficient allocations. A dynamic efficient allocation will not automatically satisfy the sustainability criterion, but can be consistent with sustainability. With a discount rate greater than zero, an economically efficient allocation will allocate more of a resource to the first period than the second. Net benefits will be greater in the first period than the second. The sustainability criterion can still be met if the first period sets aside sufficient net benefits for the second period. It is very difficult to implement because it requires knowledge of the preferences of the future generation. Total capital is defined as physical capital plus natural capital. Hartwick"s rule: if all scarcity rent is invested in capital, the value of the total capital stock will not decline, if the principal or the value of total capital is declining, the allocation is not sustainable.
