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Raghbendra Jha and K.V. Bhanu Murthy
Indira Gandi Insitute of Development Research
General Vaidya Marg
Dr. K.V. Bhanu Murthy
Reader in Economics
University of Delhi
for Discussion Roundtables 1, 2, 3, 4, 5, 7, 10, 13, 22, 23, 24, 25, 26, 27, 28, 33, 36, 37, 49 and 55
Table of Contents|
This paper argues that the notion of sustainability as used in the extant literature is incomplete because of two reasons: (i) a neglect of the spatial dimensions of sustainability and (ii) the absence of a link between sustainability on the one hand and change in behavior and property rights on the other. This paper tries to address the second issue and argues that the task of attaining sustainability essentially involves a paradigm shift in which environmental goods are first treated as merit goods in order to effect behavioral changes and ultimately as common resources. The outline of a simple fiscal policy that would affect this is also discussed.
"The advantage of economic growth is not that wealth increases happiness, but that it increases the range of human choice … We certainly cannot say that an increase in wealth makes people happier … We do not know what the purpose of life is, but if it were happiness, then evolution could have stopped a long time ago, since there is no reason to believe that men are happier than pigs, or than fishes. What distinguishes men from pigs is that men have greater control over their environment; not that they are more happy. And on this test, economic growth is greatly to be desired. The case for economic growth is that it gives man greater control over his environment, and thereby increases his freedom"
--- Sir Arthur Lewis, 1955, pp. 420-421.
Sir Arthur Lewis' quote amply summarizes the rationale for economic growth in human society. Economic growth is desired because it increases opportunities and thereby provides greater scope for action. Clearly, though, there is an intertemporal dimension to this. Enhanced scope for action today may be available only by reducing such scope in the future. The environment is the principal example of this. But it is, by no means, the only one. For example, the no-Ponzi game condition restricting the growth of public debt (see Blanchard and Fischer (1989), for example) such that the state (or private individuals) do not borrow indefinitely from future generations in order to finance current consumption, is surely part of the same concern as, for example, that of preserving biodiversity. The stock of natural, human and physical capital must all be maintained at some, as yet vaguely defined, "optimal" levels over time. The message that we live off resources borrowed from future generations rather than those inherited from our ancestors has to be enshrined as a basic principle of economic constitutions the world over.
The notion that economic growth has to be sustainable is part of this constitution. But sustainability can have several alternative definitions. Before we discuss some of the notions that have been used in the literature and propose our own, it should be realized that just as important as the definition of sustainability is the notion of sustainable for whom. Surely, for a sufficiently high price, rich OECD countries can continue to dump nuclear and toxic waste onto poor LDCs. Thus sustainability of growth can be attained for the OECD countries but not for the LDCs. Surely, this option although feasible at a point in time, cannot be continued indefinitely. Thus the applicability of the notion of sustainability has ultimately got to be universal and refer to the indefinite future. Germane to this whole argument is the notion that sustainability involves a switch in consumption possibilities both across space at a point in time and from the present to the future. When we say that a contemporaneous profile of consumption is not sustainable, then it probably means that a switch in consumption either spatially and/or over time would improve global welfare, again perceived as a magnitude referring to the indefinite future .
It is one of the principal concerns of this paper to point out that the notion of sustainability has not been sufficiently well developed in the extant literature. In particular, the full import of sustainability defined as a universal phenomenon and one that applies to the very long run, is insufficiently articulated in the literature. Developing this notion in its full generality is an important task as yet incomplete. In the present paper we take the first step in this direction by trying to focus on the consumption reducing aspect of the sustainability agenda. The consumption switching component is left for another paper . In doing so, we at once critically examine the notion of sustainability as espoused by noted commentators and extend it in areas that seem to have been ignored. In particular, we are interested in the implications of sustainability for consumer behavior and the outlining of property rights.
The rest of the paper is organized as follows. Section II details and evaluates some of the more popular existing approaches to the concept of sustainable economic development. Section III pays out the contours of an alternative approach which seeks to redress some shortcomings of the extant literature. Section IV emphasizes the role of behavioral reform and property rights in the attainment of sustainability. Section V concludes the paper.
II. Existing Approaches to Sustainability
Defining sustainable development even broadly is a non-trivial task. A further difficulty arises when we have to decide what has to be done to achieve it. The term "sustainable" is relatively easy to define: it means "enduring" or "lasting". So sustainable development is development that lasts .
The term "development" is a value-loaded concept inviting any number of interpretations. Economic development may be a relatively narrow term defined as growth in GNP per capita, or real consumption per capita and perhaps expanded to include educational and some social development indicators. The United Nations develops a Human Development Index which emphasizes literacy, life expectancy and GDP per capita. The World Commission on Environment and Development (WCED) focuses on needs and underscores its emphasis on poverty alleviation as the prime objective of sustainable development. The WCED position might be regarded as the minimum level of access to commodities and resources alone beyond which wellbeing or utility has meaning. In doing this, it achieves a starting point to an inquiry into the determinants of sustainable development.
If defining sustainable development is hard, enunciating the conditions under which it could hold is harder still. Clearly, long-term need not be equivalent to infinity - it could be a century or thereabouts with the clear indication that this would be a rolling arrangement with future generations having their own hundred year horizons. But one point that essentially remains is that the present generation is the arbiter of value. The literature on sustainable development is large and growing rapidly. Several surveys exist, e.g., Pearce et al. (1990), Chichilinsky, Heal and Vercelli (1998) and Carraro and Siniscalco (1997). . A thematic representation of some of the notions of sustainability discussed in the literature is attempted in Table 1.
The Notions of Sustainability in the Literature
All these models have some important weaknesses which reduce their appeal as providers of a framework to analyze sustainability. For example, in the models of Dasgupta and Heal (1979) and others, no absolute degradation of the exhaustible resource is permitted. However, this may be too pessimistic since it presumes that future technological growth will not reduce substantially the rate of growth of such resource use or that substitutes for this resource may not be found. In this connection Solow (1974) had shown that an economy with two factors of production (produced capital and a non renewable resource) could achieve a constant level of real per capita consumption over time if the Hotelling efficiency rule was satisfied and any one of the following three conditions held:
a) the elasticity of substitution between natural and produced capital is greater than unity (i.e., the natural resource is technically inessential for production, so that there is no need to substitute for its depletion during production);
b) the elasticity of substitution is equal to unity (so that the natural resource is essential for production) but the share of produced capital in output is greater than that of the natural resource;
c) technological progress increases the productivity of the natural resource faster than the discount rate depletes it.
Hamilton (1995) shows that the elasticity condition is crucial. Only if this elasticity is less than one will the Dasgupta Heal result hold.
In similar vein, models of the green golden rule genre (which says that the marginal rate of substitution between consumption and the natural resource should equal the rate of regeneration of the natural resource), ignores the possibility that there may be a divergence between private and social costs. Hence, the problem of attaining sustainability is viewed as one of reordering consumption over time only with no role for external effects. Models of impure altruism (which require members of the current generation to be "somewhat" altruistic) are silent on how the present generation would reconcile its own tendency to maximize utility with the demand placed on it by the requirement of altruism as well as differences among people with respect to the degree of altruism they may have. Supply side models have the shortcoming that they are tractable only under the restrictive Hotelling assumptions. Almost all these approaches are of the view that the Coase theorem using changes in property rights to attain sustainable consumption does not attain its goal. This is essentially because of three well-known reasons: (a) the Coasian assumption of zero transaction costs is invalid, (b) the bargaining process is not sufficiently analyzed and (c) by assuming only one pollutee the theorem assumes away the existence of public goods or bads .
Resource-environment interaction models of the sort that use some measure of Net Welfare are appealing, but they ignore the possibility that there maybe indivisibilities between capital and the natural resource. Models that require the attainment of a vector of social objectives take these objectives for granted and do not rationalize them in terms of individual behavior.
One such aspect of individual behavior that is critical to an analysis of sustainability is the discount rate. We now comment on its use in some models of sustainable behavior.
The Discount Rate in Models of Sustainable Development
As Pezzey (1989) argues a solution to the optimal growth problem:
subject to various resource allocation constraints, where U is utility of a representative individual, C is real consumption and * is the rate of discount, may or may not be sustainable. To make the solution to the optimal growth problem to be coincident with that of the sustainability problem we have to have an appropriate discount rate. The higher the rate of discount, ceteris paribus, the greater is the risk that the path of consumption may not be sustainable. The smaller is the rate of discount the less the chance that the existing stock of natural resource will be extinct in finite time.
If welfare is based on consumption, then the appropriate rate of discount is the social rate of return on investment given by
where SRRI is the social rate of return, r represents the preference of a representative individual for consumption today rather than tomorrow. The term inside the square brackets [.], represents the rate of growth of consumption and * represents the elasticity. r is the pure rate of time preference and would induce people to prepone consumption whereas the second term captures the fact that since we are likely to be richer in the future, present consumption is more highly valued. There are two important points to be noted here: (a) if the pure rate of time preference is deemed to be "too high", then it might be necessary to effect behavioral changes ; (ii) it may be misleading to make an assumption about the rate of discount without some plausible future scenario in mind. The most ordinary argument that seeks to explain the preference for present consumption is that people do so due to the fear of dying. While this might be justified for an individual, it has no relevance for the society as a whole. Society would or should survive generation after generation and, hence, sustainability concerns many generations. A concern of the sustainability literature and this paper is that such myopic individual behavior should not determine the fate of future generations.
It is well known that there are immediate links between the rate of discount and the rate at which the price of an exhaustible resource rises. In a world with zero extraction costs, this price would rise at the rate of discount. An important question that arises here is that if current users do not expect any benefit from the future extractive activity and are maximizing short-term utility, they would ignore the rent and consume everything now. Thus along with determining an appropriate rate of increase of the price of the resource, we face the task of defining property rights over future consumption. If such property rights were not defined there would be an over-exploitation of resources.
The upshot of this argument is that if we wish to lower the discount rate to better target sustainability, we would have to work on the twin targets of behavioral changes and better defining of property rights . The need to address these targets forms the basis for some of the key arguments of this paper.
III. A New Approach toward Sustainability
In thinking about and developing a framework for analyzing sustainability it is best to begin from first principles. Some of these principles are listed below.
1. Individual behavior of members of the current generation should not completely determine the fate of future generations.
2. Future generations must be ensured the required minimum level of consumption.
3. The purview of sustainability must be expanded to include the possibility of divergence between social and private costs and the existence of public goods. Sustainability should not be narrowly interpreted in terms only of tradeoffs in intertemporal consumption.
4. The price path of natural resources and property rights to future consumption must be so defined as to avoid over-exploitation by the present generation.
5. In some situations the market may not have a solution.
6. Hence, there may be a rationale for non-market intervention.
7. The design of this intervention is an important aspect of a strategy to attain sustainability.
It is the contention of this paper that an appropriate strategy for the attainment of sustainability would involve a change in behavioral patterns and a clearer definition of certain property rights. We elaborate somewhat on these themes.
Behavior of agents
Utility maximizing behavior of the consumer (that forms the basis of most of the models of inter-generational optimization) is based on the implicit assumption that the consumer does not face the possibility of extinction. This is explicitly stipulated in models of infinite horizon and implicitly so in models where finitely lived individuals leave bequests. This is justified only so long as adverse situations, with the potential of the consumer becoming extinct, are not encountered. An analogy with producer behavior might be helpful here. When faced with adverse market conditions that may imply the possibility of his being driven out of business, a producer could switch from profit maximization to loss minimization (as opposed to cost minimization) by avoiding variable costs, in the hope that, in the long run, fixed costs would vanish and profits would be revived. Thus there is a change in the production plans in the face of adversity. This change is warranted by theory as well as by prudence. However, there is no such immediate parallel in regard to consumer behavior. One could stipulate that the consumer should voluntarily reduce consumption to a level that would ensure sustainable consumption. But voluntary restraint in the absence of any obvious fixed cost would be difficult to expect from the consumer. Thus unsustainable behavior by the consumer ultimately leading to extinction cannot be ruled out. If the present generation persists with its existing behaviour, it may spell the extinction of future generation (Seibert(1998), pp.262). Hence, with laissez faire, there is no conceivable welfare neutral, or welfare superior behavior that is democratic and that can steer clear from the threat of extinction.
An additional dimension of the problem is that even if alternative behavior by the consumer could be conceived, the consumer does not suo moto perceive the threat of extinction. Hence, there is no scope for postulating switching behaviour. The expected behaviour of the present generation shall continue to be one of maximizing utility, and therefore, consumption. This state of affairs cannot be allowed to prevail in the interest of posterity. It calls for some intervention not only because some degree of inter-generational equity must be established but also because the portent of extinction must be perceived and stopped.
Another way of visualizing this problem is to say that, by virtue of not being born at the present point in time, future generations are not able to exercise their property rights over resources. Hence, they may be denied the rights to the flow of consumption from this resource stream.
Property rights in the context of this paper refer to the rights of future (yet unborn) generations. In principle, property rights need to be established over various categories of goods with the following broad characteristics: rivalry in use; and exclusion provisos. Rivalry implies that individuals compete with each other in using the good. In addition to rivalry, if other potential users can be excluded from consuming the good would acquire the character of being a private good. When there is no such rivalry and no exclusivity can be established, the good becomes a pure public good. In the case of such goods, individuals cannot exercise private property rights. Within the category of public goods there are various levels of congestion. Thus, we may define the following terms:
Pure Public Good:
This is a good which is consumed in its entirety by the whole population. The quality of this good is the same for all consumers.
Q = Q1 = Q2 = Q3……= Qn
U = U1 = U2 = U3……= Un
where Q= quantity and U= quality and 1,2,3….n = individuals.
One consumer can increase consumption only at the expense of other consumers.
Q = Q1 + Q2 + Q3……+ Qn
Private goods would fall in this category.
Q = Q1 + Q2 + Q3+……+ Qt
where the subscript denotes time. A natural candidate is exhaustible resources.
For (n – x) individuals (out of n) consumption is positive while for x individuals it is zero because some exclusion technology/ proviso exists.
As the number of individuals rises, the per capita quality of the goods declines.
If there is no rivalry, amongst those who can use this good, but, in some form, the beneficiaries can impose exclusion on other individuals, it becomes a club good.
If it is thought on the basis of existing technology and consumer preferences that the commodity in question should no longer be produced yet it is deemed socially useful and production is encouraged, the commodity in question is a merit good.
It is useful to summarize this classification of these goods as in Table 2.
Property Rights and Classification of Goods
This table helps us classify environmental goods. The two extremes represent private goods (north-west corner) and pure public goods (south-east corner). The definitional space consists of other intermediate goods that are placed in between.
We define environmental goods as such intermediate goods in the case of which there is partial rivalry in use. This is because congestion exists amongst the users of one generation. In addition, there is inter-temporal rivalry and exclusion is possible by virtue of the present generation’s implicit ability to appropriate the resources, to the relative exclusion of the future generations.
IV. Sustainability: The Present Approach
We may think of the environment as serving four functions:
a) Providing public goods for consumption, examples include clean air; b) supplier of raw materials (e.g. natural resources); c) receptacle for pollutants, e.g. rain forests; and d) space locations. An environmental good is to be viewed as being composite in character and may possess one or more of the above the above functional qualities.
The present paper sees sustainability as strategy for inducing a paradigm shift, whereby environmental goods can be moved to the north–east corner of the definitional space in Table 2. We have remarked on the fact that, left to themselves, members of the current generation would not sufficiently honor the claims of the future generations to the environment. Hence, this transition is to be effected by first considering environmental goods as merit goods. Hence, we first move east to go north-east in Table 2. This movement makes clear the changes in property rights in respect of environmental goods that would have to be effected in order to make their use sustainable. In the absence of such a paradigm shift, environmental goods would slide into the north-west corner. Or, at the best, in certain cases, they may emerge as club goods. Such moves would militate against inter-generational equity as well as against sustainability. This paradigm shift can only be achieved through a multi-pronged strategy involving institutional change, behavioral changes, technological change and benign market interventions9. In the case of non-renewable resources the urgency lies in evolving a strategy such that the desired change takes place before the resource gets exhausted.
To make matters a bit more concrete we pursue (in Figure 1) the role of tax policy in bringing about changes in tastes, giving property rights to current resources to future generations and thereby attaining sustainability. Figure 1 conceives of the market for environmental goods in partial equilibrium. DD' is the market demand curve and OS the supply schedule. Competitive equilibrium occurs at F with consumption equal to OX and price OK. It has been the contention of this paper that this consumption is excessive. With a tax on producers to reflect the external diseconomy caused, the supply curve shifts to TS'. Equilibrium consumption is now OQ and the price OP. This would have been the standard remedy for an externality problem. However, if we consider the consumption level OQ as non sustainable, we can proceed as follows. We realize that the pre tax producer price is OK. We can then impose a tax on consumers to the extent of TM, thereby inducing them to consume still less. The market price is now OL. The drop in consumption from X to Q was to correct for external effects whereas that from Q to Y is to address the sustainability issue. Thus concerted action by the social planner results in a level of consumption that is sustainable and corrects for external effects. Figure 1
Note to reader:
Figure 1 was not sent by email (see author).
The role of the Social Planner is crucial here. If the tax is imposed with certain conditions there is a possibility that it will induce certain long-term behavioral changes. If the producers/consumers are told that the taxes are medium-term measures and that they would be removed as soon as they take effective measures to arrest environmental degradation, they would hope to enjoy the benefits in the near future. In the process of tax imposition, property rights are indirectly being defined. This analysis, however, implicitly assumes that the funds collected from the taxes would be used for pursuing policies that would further the aim of attaining sustainable development. This would include expenditure on appropriate research and technology, consumer information campaigns, earmarking of funds for resource conservation and preservation and so on. Through these tax-expenditure policies by a benign social planner in the present generation, society is able to implicitly transfer property rights over current resources to future generations.
The government must impose the tax as a group measure (say, upon an industry), so that peer pressure will work towards compliance by the errant producers. The producer would have to comply or quit. There would be a pecuniary interest on the part of the peers. The consumers would also be made to perceive the loss to society due to environmental degradation. They might become more aware of the future threat. Weisbrod (1964) and Bishop (1982) have pointed out that in such circumstances the consumer is prepared to pay a sum in excess of the expected consumer’s surplus (access value) for enjoying the environmental good under conditions of uncertainty (say, the threat of extinction). Hence, as in Figure 1, the government imposes a tax on consumers. Once again, since it is a collective tax and the expectation is that the Isolation Paradox (Sen (1967)) behavior will be induced, the consumers would be prepared for the sacrifice. The future generation now receives a real bequest in the form of the balance of the environmental good and a monetary bequest in the form of the taxes. This is different from the case of Impure Altruism since it does not suffer from the problem of differences amongst individuals (egoists and altruists) because of being a social bequest. The taxes, it is assured will be used for reducing the congestion and ensuring the existence of the environmental good in the future. This also influences the implicit property rights and would, in the long-run, lower the discount rate.
This paper has argued that current deliberations on sustainability are incomplete. This is because of two principal reasons. First, there is a somewhat narrow interpretation of sustainability in terms of reductions in consumption; the spatial dimension of stability is not considered. Second, even in the context of reductions in consumption, the literature does not make clear the crucial role of behavioral changes and transfer of property rights over natural and environmental resources from the current generations to future generations.
The present paper has underscored these shortcomings. But it has chosen to concentrate only on the problem of consumption reduction, leaving the spatial dimension and an integration of the two for another paper. It advocates a complex strategy for attaining the reductions in consumption necessary for attaining sustainability. It advocates the use of group taxes on producers as well as consumers. Second, the tax revenues so collected are earmarked for spending for the purpose of the environment. The resulting lowering of the discount rate and behavioral changes would lead to a drop in the rate of increase of prices of natural resources and, therefore, to a postponement of their consumption. All these involve the design of an intermediate run policy that treats environmental goods as merit goods as a prelude to their (ultimately) being treated as common resources.
In the long-run, it is expected that behavioral changes and well-define property rights would set-in a social dynamics that would endogenize the process of sustainability (The Endogenous Sustainability Hypothesis). Of course, it may be necessary to introduce and withdraw both the taxes in an iterative manner because social behavior may not irreversibly change, at one go. A distinct problem relates to the different treatment for renewable and non-renewable resources. This may be looked upon as a problem of the speed of adjustment. In the case of non-renewable resources the speed has to be faster, if such resources are essential to production. In such cases, greater reliance must be placed on exogenous changes in technology and tastes. In the case of renewable resources the expected change is essentially endogenous.
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