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Sustainability and Substitution of Exhaustible Natural Resources. How resource prices affect long-term R&D investments

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  • Lucas Bretschger

    (WIF – Institute of Economic Research, ETH-Zentrum, Zurich, Switzerland)

  • Sjak Smulders

    (Department of Economics, Tilburg University, The Netherlands)

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&D-based endogenous growth model with exhaustible natural resources, labour, knowledge, and physical 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. We demonstrate that long-run growth can be sustained under free market conditions even when elasticities of substitution between capital and resources are low and the supply of physical capital is limited, which seems to be crucial for today’s sustainability debate.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2003.87.

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Date of creation: Sep 2003
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Handle: RePEc:fem:femwpa:2003.87

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Keywords: Growth; Non-renewable resources; Substitution; Investment incentives; Endogenous technological change; Sustainability;

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References

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  1. Christian Groth & Poul Schou, 2000. "Can Nonrenewable Resources Alleviate the Knife-edge Character of Endogenous Growth," Discussion Papers 00-02, University of Copenhagen. Department of Economics.
  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. 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.
  4. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  5. Smulders, J.A., 1995. "Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153411, Tilburg University.
  6. Heal, G., 1990. "The Optimal Use Of Exhaustible Resources," Papers fb-_90-10, Columbia - Graduate School of Business.
  7. 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.
  8. 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.
  9. John Hartwick, 1976. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," Working Papers 220, Queen's University, Department of Economics.
  10. 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.
  11. Bovenberg, A.L. & Smulders, J.A., 1993. "Environmental quality and pollution-saving technological change in a two-sector endogenous growth model," Discussion Paper 1993-21, Tilburg University, Center for Economic Research.
  12. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers 99001, Stanford University, Department of Economics.
  13. 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.
  14. R. M. Solow, 1973. "Intergenerational Equity and Exhaustable Resources," Working papers 103, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. 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.
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