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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.

Suggested Citation

  • Bazhanov, Andrei, 2012. "Disregarded inefficiency may dominate sustainability policies," MPRA Paper 43621, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:43621
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    More about this item

    Keywords

    Dynamic inefficiency; Investment; Natural resource; Sustainability;
    All these keywords.

    JEL classification:

    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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