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Disregarded inefficiency may dominate sustainability policies

  • Bazhanov, Andrei

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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File URL: https://mpra.ub.uni-muenchen.de/43621/1/MPRA_paper_43621.pdf
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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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  8. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, June.
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  17. Bazhanov, Andrei, 2008. "Sustainable growth in a resource-based economy: the extraction-saving relationship," MPRA Paper 12350, University Library of Munich, Germany.
  18. Avinash Dixit & Peter Hammond & Michael Hoel, 1980. "On Hartwick's Rule for Regular Maximin Paths of Capital Accumulation and Resource Depletion," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 551-556.
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  23. Andrei Bazhanov, 2012. "A Closed-Form Solution to Stollery’s Problem with Damage in Utility," Computational Economics, Society for Computational Economics, vol. 39(4), pages 365-386, April.
  24. Pezzey, J., 1992. "Sustainable Development Concepts; An Economic Analysis," Papers 2, World Bank - The World Bank Environment Paper.
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