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Limits to Substitution Between Ecosystem Services and Manufactured Goods and Implications for Social Discounting

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  • Moritz A. Drupp

    (University of Kiel
    London School of Economics and Political Science)

Abstract

This paper examines implications of limits to substitution for estimating substitutability between ecosystem services and manufactured goods and for social discounting. Based on a model that accounts for a subsistence requirement in the consumption of ecosystem services, we provide empirical evidence on substitution elasticities. We find an initial mean elasticity of substitution of two, which declines over time towards complementarity. We subsequently extend the theory of dual discounting by introducing a subsistence requirement. The relative price of ecosystem services is non-constant and grows without bound as the consumption of ecosystem services declines towards the subsistence level. An application suggests that the initial discount rate for ecosystem services is more than a percentage-point lower as compared to manufactured goods. This difference increases by a further half percentage-point over a 300-year time horizon. The results underscore the importance of considering limited substitutability in long-term public project appraisal.

Suggested Citation

  • Moritz A. Drupp, 2018. "Limits to Substitution Between Ecosystem Services and Manufactured Goods and Implications for Social Discounting," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 69(1), pages 135-158, January.
    • Handle: RePEc:kap:enreec:v:69:y:2018:i:1:d:10.1007_s10640-016-0068-5
    DOI: 10.1007/s10640-016-0068-5
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    More about this item

    Keywords

    Dual discounting; Ecosystem services; Limited substitutability; Project evaluation; Subsistence; Sustainability;
    All these keywords.

    JEL classification:

    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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