Wealth, Welfare and Sustainability

Abstract

Growing concerns over climate change and the potential for large damages due to non-linear processes underscore the need for meaningful sustainability assessment of an economy. Economists have developed rigorous approaches to conceptualizing sustainability based on the paradigm of weak sustainability, which assumes infinite substitution between manufactured and natural capital stocks. In contrast, strong sustainability emphasizes physical limits to this substitution and the importance of maintaining the resilience of normally functioning biophysical processes. Recent progress in resource and environmental economics has demonstrated the feasibility of incorporating strong sustainability features, including tipping points, uncertainties and resilience, into welfare theoretic models to assess efficiency and optimal policies. Given that weak sustainability and intertemporal efficiency share the same concept of welfare, we ask: to what extent can these approaches be applied to evaluate sustainability? We highlight recent work on assessing sustainability in imperfect economies and dynamic models of intertemporal welfare that embed strong sustainability features.

Keywords: non-convexities, uncertainty, resilience, coupled human-natural systems, benefit cost analysis