Sustainable Development – defining the concept Quest of all of us

Identifying the concept We have developed 2 methods of identifying environmental problems: We have developed 2 methods of identifying environmental problems:  Static efficiency: time not crucial for allocation – water/solar energy: next years flow independent of this years’ choices  Dynamic efficiency: time crucial –oil: used now is unavailable for future generations Harmony between economy & environment Harmony between economy & environment Fairness & justice – treatment of future generations Fairness & justice – treatment of future generations

A two period model Dynamic efficiency balances present & future uses of depletable resources by maximising the present value of net benefits derived from its use – allocation of resource across time. Dynamic efficiency balances present & future uses of depletable resources by maximising the present value of net benefits derived from its use – allocation of resource across time.Assumptions: Fixed supply Fixed supply Demand constant in 2 periods Demand constant in 2 periods Marginal willingness to pay is P=8-0.4q Marginal willingness to pay is P=8-0.4q MC constant at $2 per unit MC constant at $2 per unit Total supply is 30 or more Total supply is 30 or more Efficient allocation is 15 in each period, when there are only 2 periods, regardless of discount rate Efficient allocation is 15 in each period, when there are only 2 periods, regardless of discount rate

Allocation of an Abundant Depletable Resource Period I & II If the available supply were 30 or more and we have just 2 periods to think about, the efficient allocation is 15 in each period regardless of DR – static efficiency – allocation not interdependent Quantity (units) Price- $ per unit MC P-IP-II $45

What if the supply is less than 30? Suppose 20 – dynamic efficiency criterion: allocation that maximise present value of net benefit - for both periods = sum of present value in each of the 2 periods Suppose 20 – dynamic efficiency criterion: allocation that maximise present value of net benefit - for both periods = sum of present value in each of the 2 periods 15 in I and 5 in II 15 in I and 5 in II I: $45 I: $45 In II: $22.73 ( undiscounted net benefit=(6-2)x 5 + ½(8-6)x5= $25. Discounted net benefit = 25/1.10=22.73) In II: $22.73 ( undiscounted net benefit=(6-2)x 5 + ½(8-6)x5= $25. Discounted net benefit = 25/1.10=22.73) PVNB for 2 years = $67.73 PVNB for 2 years = $67.73

Dynamic allocation efficiency * Qn in PI Qn in PII Marginal net benefit in PI - $ per unit Marginal net benefit in PII -$ per unit PVMNB in PI PVMNB in PII

MNB in Period I goes to zero at 15 units as willingness to pay at that = its cost MNB in Period I goes to zero at 15 units as willingness to pay at that = its cost At price $8 – no demand & MC is $2 ∴ MNB is $6 At price $8 – no demand & MC is $2 ∴ MNB is $6 PII: Mb need to be discounted ( multiplied by 1/(1+r). With DR 10% : $6/1.10 = $5.45 PII: Mb need to be discounted ( multiplied by 1/(1+r). With DR 10% : $6/1.10 = $5.45 This is an efficient allocation, therefore the sum of two areas is maximised. This is an efficient allocation, therefore the sum of two areas is maximised. These criteria is independent of any institutional context. Therefore, they are equally appropriate for evaluating resource allocations generated by markets, rationing system, whims of a dictator These criteria is independent of any institutional context. Therefore, they are equally appropriate for evaluating resource allocations generated by markets, rationing system, whims of a dictator Although any efficient allocation must take scarcity into account, how to do it depends on the context. Although any efficient allocation must take scarcity into account, how to do it depends on the context.

Consumption in period 1 doesn’t affect C n in the other – static efficiency criterion is sufficient ∵ allocation is not interdependent Consumption in period 1 doesn’t affect C n in the other – static efficiency criterion is sufficient ∵ allocation is not interdependent Dynamically efficient allocation has to satisfy: Present value of the marginal net benefit (from last unit) in period I = PV of MNB in period II Dynamically efficient allocation has to satisfy: Present value of the marginal net benefit (from last unit) in period I = PV of MNB in period II Any efficient allocation should take scarcity into account – opportunity cost Any efficient allocation should take scarcity into account – opportunity cost Consumption that is fair in absence of scarcity may not be appropriate while it is scarce – lawns Consumption that is fair in absence of scarcity may not be appropriate while it is scarce – lawns

A Theory of Justice Future generations – unable to speak for themselves - what legacy are we leaving for them? Future generations – unable to speak for themselves - what legacy are we leaving for them? Rawls: general principal of justice: hypothetically place all people into an original position (behind a veil of ignorance) – they will forget their position in the society – will decide on rules to govern their society in which they will live after their decision Rawls: general principal of justice: hypothetically place all people into an original position (behind a veil of ignorance) – they will forget their position in the society – will decide on rules to govern their society in which they will live after their decision Hypothetically, it’s the meeting of present & future generations Hypothetically, it’s the meeting of present & future generations

Result: sustainability Result: sustainability Future generations no worse off than present generations Future generations no worse off than present generations Diverting resources from future use violates sustainability criterion Diverting resources from future use violates sustainability criterion Do our institutions provide protection? Do our institutions provide protection? Difficult to apply sustainability criterion - to know about the well-being of future generations – do we know their preferences? Difficult to apply sustainability criterion - to know about the well-being of future generations – do we know their preferences? Are all efficient allocation sustainable? Are all efficient allocation sustainable?

John Rawls ( ), American moral and political philosopher, whose major work, A Theory of Justice, had a profound impact on ethics and political theory after its publication in John Rawls ( ), American moral and political philosopher, whose major work, A Theory of Justice, had a profound impact on ethics and political theory after its publication in 1971.ethics political theoryethics political theory The principles of justice, Rawls argued, determine how the benefits and burdens of society are to be distributed among individuals in a fair manner. Thus for Rawls, justice is fairness. Yet how can people determine what is fair, especially in a society of great inequalities and diverse interpretations of the good life? Rawls theorized that the principles of fairness are those that would be agreed upon by people in a hypothetical situation he referred to as the ‘Original position’. The principles of justice, Rawls argued, determine how the benefits and burdens of society are to be distributed among individuals in a fair manner. Thus for Rawls, justice is fairness. Yet how can people determine what is fair, especially in a society of great inequalities and diverse interpretations of the good life? Rawls theorized that the principles of fairness are those that would be agreed upon by people in a hypothetical situation he referred to as the ‘Original position’.

In his work Rawls sought to develop an alternative conception of justice to that of utilitarianism—the doctrine that humans should always act in a way that provides the greatest benefits for the most people. In his work Rawls sought to develop an alternative conception of justice to that of utilitarianism—the doctrine that humans should always act in a way that provides the greatest benefits for the most people.utilitarianism Rawls considered this doctrine a threat to individual rights Rawls considered this doctrine a threat to individual rights

Harkwick Rule Article – 1977 Article – 1977 Developed a version of sustainability criterion that can be used – Harkwick rule Developed a version of sustainability criterion that can be used – Harkwick rule With this version it is possible to judge sustainability of allocation and the analysis suggests a specific degree of sharing that produces sustainable outcome: all scarcity rent should be invested. With this version it is possible to judge sustainability of allocation and the analysis suggests a specific degree of sharing that produces sustainable outcome: all scarcity rent should be invested. Apply this to environment?! – we have got some endowments - ‘natural capital’ & physical capital (buildings, roads, machines,..) – make sustainable use Apply this to environment?! – we have got some endowments - ‘natural capital’ & physical capital (buildings, roads, machines,..) – make sustainable use Sustainable use= keep principal intact and use up only the flow of services – physical capital cannot substitute for natural capital ∴ investments in physical capital may not be enough to assure sustainability Sustainable use= keep principal intact and use up only the flow of services – physical capital cannot substitute for natural capital ∴ investments in physical capital may not be enough to assure sustainability

Sustainable allocation Is one that maintains the value of the stock of natural capital Is one that maintains the value of the stock of natural capital Weak sustainability: maintenance of the value of total capital Weak sustainability: maintenance of the value of total capital Strong sustainability: maintaining value of natural capital Strong sustainability: maintaining value of natural capital Environmental sustainability: requires certain physical flows of certain individual resources to be maintained e.g. Fishery: catch levels cannot exceed growth of biomass Environmental sustainability: requires certain physical flows of certain individual resources to be maintained e.g. Fishery: catch levels cannot exceed growth of biomass

Criterion of sustainability & efficiency must neither be synonymous nor incompatible Criterion of sustainability & efficiency must neither be synonymous nor incompatible Market allocations may be sustainable / unsustainable or efficient / inefficient Market allocations may be sustainable / unsustainable or efficient / inefficient Choose the use of resource that fulfils sustainable criterion and one that maximises either dynamic or static efficiency Choose the use of resource that fulfils sustainable criterion and one that maximises either dynamic or static efficiency Removing inefficiency increases net benefits Removing inefficiency increases net benefits Compensate those who loose by change Compensate those who loose by change It reduces the opposition to change. It reduces the opposition to change.

Finally, Efficiency & ethical considerations can guide the desirability of private & social choices involving the environment Efficiency & ethical considerations can guide the desirability of private & social choices involving the environment Efficiency: eliminating waste in the use of resources Efficiency: eliminating waste in the use of resources Ethical: assuring the fair treatment to all Ethical: assuring the fair treatment to all Obligation that previous generations owe to future generations – policies that accept that obligation – sustainable development – based on the notion that earlier generations free to pursue their own well- being as long as they are not diminishing the welfare of future generations Obligation that previous generations owe to future generations – policies that accept that obligation – sustainable development – based on the notion that earlier generations free to pursue their own well- being as long as they are not diminishing the welfare of future generations