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Conditions for Sustainable Optimal Economic Development

Listed author(s):
  • Y. Hossein Farzin

This paper shows that, for dynamic optimizing economies with different types of natural resource, environmental, and human-made capital stocks, a necessary and sufficient condition for permanently sustaining an optimal utility/consumption level is the stationarity of the current-value Hamiltonian. For economies whose development is not exogenously and directly affected by time (i.e., time-autonomous economies), this stationarity condition generalizes Dixit et al.'s (1980 ) "zero-net-aggregate-investment" rule of sustain-ability, which in turn generalizes Solow-Hartwick's sustainability rule. For non-autonomous economies, the stationarity condition is not generally fulfilled, and the current-value Hamiltonian under (over) estimates the true welfare level by an amount equal to the discounted value of the net "pure time effect." For the non-autonomous case of a time-dependent utility discount rate, a general condition on the discount rate function (of which the hyperbolic discount rate function is a special case) upholds the results obtained for autonomous cases. The paper concludes with a discussion of policies that promote both optimality and sustainability objectives. Copyright © 2006 The Author; Journal compilation © 2006 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 10 (2006)
Issue (Month): 3 (August)
Pages: 518-534

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Handle: RePEc:bla:rdevec:v:10:y:2006:i:3:p:518-534
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