Irreversibility and Uncertainty Cause an Intergenerational Equity-Efficiency Trade-Off

40 Pages Posted: 20 Feb 2011 Last revised: 3 Sep 2016

See all articles by Nikolai Hoberg

Nikolai Hoberg

Leuphana University of Lüneburg - Dept. of Sustainability Sciences and Dept. of Economics

Stefan Baumgärtner

University of Freiburg - Department of Environment and Natural Resources

Date Written: August 25, 2016

Abstract

Two important policy goals in intergenerational problems are Pareto-efficiency and sustainability, i.e. intergenerational equity. We demonstrate that the pursuit of these goals is subject to an intergenerational equity-efficiency trade-off. Our analysis highlights two salient characteristics of intergenerational problems and policy: (i) temporal irreversibility, i.e. the inability to revise one’s past actions; and (ii) uncertainty of future consequences of present actions in human-environment systems. We employ a two-non-overlapping-generations model that combines an intragenerational production decision on the use of circulating capital and a non-renewable resource, with a negative intergenerational externality as an unforeseen contingency. If initially unknown problems become apparent and policy is enacted after irreversible actions were taken, policy-making faces a fundamental trade-off between ex-post Pareto-efficiency and sustainability. That is, one can achieve either one of these two goals, but not both.

Keywords: Climate Change, Closed Ignorance, Intergenerational Equity-Efficiency Trade-Off, Irreversibility, Pareto-Efficiency, Sustainability, Unawareness

JEL Classification: D3, H23, Q01, Q38, Q56

Suggested Citation

Hoberg, Nikolai and Baumgärtner, Stefan, Irreversibility and Uncertainty Cause an Intergenerational Equity-Efficiency Trade-Off (August 25, 2016). Ecological Economics, 131, 75-86 (2017 Forthcoming), Available at SSRN: https://ssrn.com/abstract=1764443 or http://dx.doi.org/10.2139/ssrn.1764443

Nikolai Hoberg

Leuphana University of Lüneburg - Dept. of Sustainability Sciences and Dept. of Economics ( email )

Scharnhorststrasse 1
Lüneburg, 21314
Germany

Stefan Baumgärtner (Contact Author)

University of Freiburg - Department of Environment and Natural Resources ( email )

Tennebacher Str. 4
Freiburg, 79106
Germany

HOME PAGE: http://www.ere.uni-freiburg.de

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