Chapter 13: IS-LM-EE: Incorporating an Environmental Equilibrium Curve into the IS-LM Model
INTRODUCTION It is more than a decade since Daly (1991b) urged the incorporation of environmental concerns into the macroeconomic models used to conduct policy analysis. Until recently, Daly’s plea was ignored. Of course, it would be erroneous of me to overlook the many attempts to integrate environmental factors into macro policy issues. The expanding literature on green national accounting and ecological tax reform is ample evidence of the extent to which environment-economy relations have made their way into policy analysis. Furthermore, considerable work has been undertaken to answer the following questions put forward by Daly at the time he was urging the development of an environmental macroeconomics: (a) How big can a macroeconomy grow before the throughput of matter-energy required to sustain the macroeconomy exceeds the regenerative and waste assimilative capacities of the natural environment?; and (b) How big can a macroeconomy grow before the additional beneﬁts of growth are exceeded by the additional costs – that is, before the economic welfare generated by a growing macroeconomy begins to decline? As far as Daly is concerned, the failure of macroeconomists to deal with the second question is at odds with microeconomic theory. Microeconomics is based largely on the concept of optimal scale. Whether it is the output of a ﬁrm or the number of hours an individual spends at work, the customary microeconomic rule is to increase the scale of an activity while the marginal beneﬁts continue to exceed the marginal costs. However, once marginal beneﬁts and costs...
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