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Disregarded inefficiency may dominate sustainability policies

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  • Bazhanov, Andrei

Abstract

This paper examines the effects of ignored inefficiencies on the reliability of sustainability indicators and effectiveness of investment in resource-based economies. A model of a social planner does not include some phenomena that may influence the path of utility. These unspecified phenomena may cause inefficiency of the economy. In order to simulate this natural discrepancy between theory and real life, this study assumes that the planner applies the policies developed for an efficient (undistorted) model, whereas the real economy is distorted by some neglected effects that can influence utility, production, the balance equation, and the dynamics of the reserve. The resulting inefficiency affects the dependence of current utility change on investment. The analysis shows that, for sustainability in the presence of inefficiency, first, institutional and resource policies may become more important than investments; and secondly, it is preferable to underextract a natural resource under uncertainties in production possibilities and damages from economic activities. An inadequate accounting system, underestimated production possibilities, and insecure property rights are considered as examples of disregarded inefficiencies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43621.

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Date of creation: 08 Oct 2012
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Handle: RePEc:pra:mprapa:43621

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Keywords: Dynamic inefficiency; Investment; Natural resource; Sustainability;

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  1. John Hartwick, 1976. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," Working Papers, Queen's University, Department of Economics 220, Queen's University, Department of Economics.
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  7. Kirk Hamilton & Giovanni Ruta & Liaila Tajibaeva, 2006. "Capital Accumulation and Resource Depletion: A Hartwick Rule Counterfactual," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 34(4), pages 517-533, August.
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  10. Bazhanov, Andrei V., 2010. "Sustainable growth: Compatibility between a plausible growth criterion and the initial state," Resources Policy, Elsevier, Elsevier, vol. 35(2), pages 116-125, June.
  11. Bazhanov, Andrei, 2011. "The dependence of the potential sustainability of a resource economy on the initial state: a comparison of models using the example of Russian oil extraction," MPRA Paper 35870, University Library of Munich, Germany.
  12. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521337465.
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  17. Kenneth Arrow & Partha Dasgupta & Karl-Göran Mäler, 2003. "Evaluating Projects and Assessing Sustainable Development in Imperfect Economies," Working Papers, Fondazione Eni Enrico Mattei 2003.109, Fondazione Eni Enrico Mattei.
  18. Frederick Ploeg, 2011. "Rapacious Resource Depletion, Excessive Investment and Insecure Property Rights: A Puzzle," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 48(1), pages 105-128, January.
  19. Hamilton, Kirk & Clemens, Michael, 1999. "Genuine Savings Rates in Developing Countries," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(2), pages 333-56, May.
  20. Kirk Hamilton & Cees Withagen, 2007. "Savings growth and the path of utility," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 40(2), pages 703-713, May.
  21. Bazhanov, Andrei, 2008. "Sustainable growth in a resource-based economy: the extraction-saving relationship," MPRA Paper 12350, University Library of Munich, Germany.
  22. Dixit, Avinash & Hammond, Peter & Hoel, Michael, 1980. "On Hartwick's Rule for Regular Maximin Paths of Capital Accumulation and Resource Depletion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(3), pages 551-56, April.
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