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Sustainability and substitution of exhaustible natural resources. How resource prices affect long-term R&D-investments

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Abstract

Traditional resource economics has been criticised for assuming too high elasticities of substitution, not observing material balance principles and relying too much on planner solutions to obtain long-term growth. By analysing a multi-sector R&Dbased endogenous growth model with exhaustible natural resources, labour, and knowledge capital as inputs, the present paper addresses this critique. We study transitional dynamics and the long-term growth path and identify conditions under which firms keep spending on research and development so that growth is sustained. We demonstrate that long-run growth can be sustained under free market conditions even when elasticities of substitution between man-made inputs and resources are low.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 03/26.

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Length: 30 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:eth:wpswif:03-26

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Keywords: Growth; non-renewable resources; substitution; investment incentives; endogenous technological change; sustainability;

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  1. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  2. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
  3. Poul Schou, 2000. "Polluting Non-Renewable Resources and Growth," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(2), pages 211-227, June.
  4. Bretschger, Lucas, 1998. "How to substitute in order to sustain: knowledge driven growth under environmental restrictions," Environment and Development Economics, Cambridge University Press, vol. 3(04), pages 425-442, October.
  5. Heal, G., 1990. "The Optimal Use Of Exhaustible Resources," Papers fb-_90-10, Columbia - Graduate School of Business.
  6. Bovenberg, A.L. & Smulders, S., 1993. "Environmental Quality and Pollution-Saving Technological Change in Two- Sector Endogenous Growth Model," Papers 9321, Tilburg - Center for Economic Research.
  7. Lans Bovenberg, A. & Smulders, Sjak, 1995. "Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model," Journal of Public Economics, Elsevier, vol. 57(3), pages 369-391, July.
  8. John Hartwick, 1976. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," Working Papers 220, Queen's University, Department of Economics.
  9. Grimaud, Andre & Rouge, Luc, 2003. "Non-renewable resources and growth with vertical innovations: optimum, equilibrium and economic policies," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 433-453, March.
  10. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
  11. Withagen, Cees & B. Asheim, Geir, 1998. "Characterizing sustainability: The converse of Hartwick's rule," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 159-165, September.
  12. Christian Scholz & Georg Ziemes, 1999. "Exhaustible Resources, Monopolistic Competition, and Endogenous Growth," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 13(2), pages 169-185, March.
  13. Cleveland, Cutler J. & Ruth, Matthias, 1997. "When, where, and by how much do biophysical limits constrain the economic process?: A survey of Nicholas Georgescu-Roegen's contribution to ecological economics," Ecological Economics, Elsevier, vol. 22(3), pages 203-223, September.
  14. Christian Groth, 2000. "Can Nonrenewable Resources Alleviate the Knife-edge Character of Endogenous Growth?," Econometric Society World Congress 2000 Contributed Papers 1480, Econometric Society.
  15. R. M. Solow, 1973. "Intergenerational Equity and Exhaustable Resources," Working papers 103, Massachusetts Institute of Technology (MIT), Department of Economics.
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