Optimal Prices for Sustainable Development

In the 1960s and 1970s the thrust of the environmentalist argument was that economic growth was inconsistent with environmental preservation. There are few better surveys of these arguments than Richard Lecomber’s own monograph (Lecomber, 1975). In the 1980s, however, the emphasis has shifted to the argument that growth is consistent with environmental preservation and that both must be sold as a ‘package’. It seems fair to say that this duality of sustainable development and sustainable use of the environment has been only lightly analysed. This paper offers one small input into what I hope is a deeper analysis of ‘sustainability’. Its starting point is a set of (as always) provocative remarks by Herman Daly in a recent essay. Daly (1986) has drawn attention to a generally unacknowledged externality relevant to the pricing of environmental services.1 Daly was commenting on the relevance of the Laws of Thermodynamics for welfare optimisation. In particular he notes that In the light of the entropy law a previously neglected aggregate constraint on the physical scale of the economy relative to the ecosystem is seen to exist. The market is, by itself, unable to reflect this constraint because Pareto optimality of allocation is independent of whether or not the scale of physical throughput is ecologically sustainable. (Daly, 1986, my italics)