Chapter 11: Genuine Saving, Social Welfare and Rules for Sustainability
Kirk Hamilton 1 INTRODUCTION Environmental accounting has its roots in concerns that the national accounts are neither accounting for the depreciation of environmental capital (when a mineral is extracted for example) nor measuring the damage from pollution of the environment which is a by-product of the generation of GDP. These concerns appear in a variety of guises in the symposium volume on environmental accounting edited by Ahmad et al. (1989), as well as in empirical work such as the Repetto et al. (1989) study of Indonesia. While these early studies focused on adjusted measures of income, Pearce and Atkinson (1993) were the first to explicitly link the changes in wealth associated with depletion and damage to the environment to an evolving theory of sustainable development. The links between sustainable development and the depletion of natural resources were laid down in earlier theoretical work in the 1970s. As a result of the concerns raised by the first oil crisis, a 1974 symposium volume of the Review of Economic Studies drew together papers by leading economists on the question of the sustainability of economies that are dependent on exhaustible resources. In a key contribution, Solow (1974) showed that constant consumption is feasible over an infinite time horizon in an economy with an exhaustible resource if the production function is Cobb-Douglas (so that the elasticity of substitution between natural resources and other factors is unity), the elasticity of output with respect to produced capital is greater than the elasticity with respect to the...
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