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Environmental Valuation II (Module 4)

Introduction

Environmental resources impart a complex set of values to individuals and various benefits to society. Environment valuation is based on the assumption that individuals are willing to pay for environmental gains and conversely, are willing to accept compensation for environmental losses. Individuals demonstrate preferences, which, in turn, place values on environmental resources. Environmental economists have developed a number of market and non-market-based techniques, based on the preferences, to value the environment.

These preferences can be either revealed preferences or stated preferences.

(I) Revealed Preference Methods or Surrogate Market Methods

In the absence of clearly defined markets, the value of environmental resources can be derived from information acquired through surrogate markets. The most common markets used as surrogates when monetizing environmental resources are those for property and labour. The surrogate market methods discussed below are the Hedonic Price method and the Travel Cost method.

a. Hedonic Pricing Method

The Hedonic Price method is based on consumer theory, which seeks to explain the value of a commodity as a bundle of various characteristics. Market goods are often regarded as intermediate inputs into the production of more basic attributes that the individuals really demand. It is based on the more general land value approach which decomposes real estate prices into components attributable to different characteristics like pollution, accessibility, proximity to schools, shops, parks, etc. The method seeks to determine the increased WTP for improved local environmental quality, as reflected in housing prices in cleaner surroundings. It assumes a competitive housing market, and its demands on information and tools of statistical analysis are high.

Multiple regression analysis is used to identify how much of a property differential is due to a particular environmental difference between properties. It has been found through several studies that multiple regression analyses in such cases over estimate the benefits by 2 to 3 times. The problem here is that most households are not aware of the costs or benefits of an environmental attribute and hence don’t know it when they adjust their residential locations due to a particular attribute.

Issues that arise while employing regression analysis in Hedonic Pricing Method:

  • The choice of variables.
  • The presence of multicollinearity (a statistical phenomenon in which two or more independent variables in a multiple regression model are highly correlated).
  • Omitted variable bias (an independent variable that should be in the model is ignored).

b. Travel Cost Approach

The Travel Cost method is a method which attempts to deduce values from observed (i.e., revealed) behaviour. has been used to measure the value of an ecosystem used for recreational purposes, by surveying travellers on the economic costs they incur (time, out-of-pocket expenditures) when visiting the site from some distance away.

It determines the WTP for access to the recreational benefits provided by the site, as a function of variables like consumer income, price, and various socio-economic characteristics. The price is usually the sum of observed cost elements like a) entry price to the site; b) costs of traveling to the site; and c) foregone earnings or opportunity cost of time spent. The consumer surplus associated with the estimated demand curve provides a measure of the value of the recreational site in question. More sophisticated versions include comparisons across sites, where environmental quality is also included as a variable that affects demand.

The estimation of recreational benefits can be done through –

  1. Continuous variable specifications where the number of visits to a site is the dependent variable and the household characteristics are the independent or explanatory variables.
  2. Discrete variable specifications where the values are restricted to a predefined set and not all characteristics of a household are taken into account.

The issues that arise with Travel Cost approach are:

  • Value attached to time – Estimated betas and estimated variables are highly sensitive to time.
  • Truncation Bias – Estimated demand equation is based on data based on the household that visited the site while the households that did not visit the site are ignored.
  • Limited in application – Captures only direct recreational benefits, and only when there are measurable travel costs.
  • Difficult to separate the effects of different factors, eg. Landscape beauty and proximity to the ocean.
  • Does not measure non-use or intrinsic values, nor commercial values.

(II) Stated Preference Methods or Non Market Methods

Stated Preference Methods seek to measure individuals’ value for environmental goods directly, by asking them to state their preferences for the environment. Unlike Revealed Preference Methods, these are used mainly to determine non-use values of the environment such as existence value, altruistic value and bequest value since these values do not turn up in any related markets. The importance of existence values was placed in the spotlight by John Krutilla’s seminal work “Conservation Reconsidered” (1967). Krutilla pointed out that certain “grand scenic wonders” and “unique natural environments” might be valued even by those who did not directly benefit from them.

Economists have traditionally been wary of stated preference methods to derive non-use values since there is wide scope for misreporting. Also, theoretically, practically everyone can claim to derive non-use values from a given environmental good. In practice however, it has been shown that the application of rigorous standards can go a long way in ensuring accuracy. The two most important (and rigorous) of these methods is the Contingent Valuation Method (CVM) and Choice Experiments (CE).

a. Contingent Valuation Method (CVM)

Contingent Valuation Method (CVM) was first used by Davis (1963) in a study of deer hunters in Maine. The CVM method to ascertain non-use values first came into the public spotlight in a significant way with the Exxon Valdez disaster of 1989. The National Oceanic and Atmospheric Administration (NOAA) of the US constituted a panel with Nobel laureates Kenneth Arrow and Robert Solow to determine whether CVM was a reliable way to ascertain lost existence values in the accident. Using the recommendations of the panel and several others, the NOAA conditionally accepted CVM as reliable, subject to elaborate guidelines for its use. Eventually an out-of-court settlement of 1.5 billion dollars was reached but a state-of-the-art CVM study pegged lost existence values alone at 3 billion dollars (Carson et al., 1992).

Most CVM exercises can be split into five stages (Hanley, Shogren and White, 2001):

Setting up a hypothetical market: This step consists of “framing” the environmental good by describing what exactly is at stake (say the destruction of an endangered species of plant due to excessive use by forest-dwellers), deciding how it would be remedied (placing a ban or limits on its use), calculating the costs entailed (resettling the forest-dwellers, providing them with alternate livelihoods) and deciding how funds would be raised (through taxes, trust fund payments).

Obtaining bids: This involves conveying the previous information to the respondents, preferably through personal interviews, and eliciting their WTP/WTA. Other information collected includes socio-economic data of the respondent and some de-briefing information. WTP/WTA information can be obtained by asking an open-ended question (respondents are asked their maximum WTP) or by a referendum-type question where respondents either answer yes or no in response to a particular payment amount. Referendums are most common.

Estimating WTP: For open-ended responses calculating mean or median WTP is simple. For referendums the WTP has to be estimated since the respondent does not reveal her maximum amount only whether or not she is willing to pay a given amount. Several approaches may be used which are beyond the scope of this article.

Aggregating the data: The mean bid or bids for the sample population must be converted into a population total value figure. This involves deciding who counts in the study – the local population, regional, national etc. Secondly is choice of the time period over which benefits should be aggregated. Here we are confronted with the limitations of using current preferences to estimate future preferences and the equity implications of discounting.

Carrying out validity checks: Several tests are carried to ascertain the robustness of the WTP figure obtained such as scope tests (is the scope of environmental change accurate?), convergent validity (is the WTP comparable to figures obtained from other methods?), are protest rates too high (those against putting a monetary value on the environmental good in question) etc.

Portney (1994) lists seven stringent guidelines issued by the NOAA (National Oceanic and Atmospheric Administration) to ensure that CVM is not misused to make offenders pay much than is fair. Some proponents of CVM were unhappy with this saying it would more often than not lead to an “underestimation” of lost existence values. Opponents of CVM claimed that CVM was altogether too arbitrary a method to give any reasonable estimate regardless of guidelines. Nevertheless CVM has become the most widely used estimate for non-use values of environmental goods owing to its simplicity, flexibility and cost-effectiveness.

The various issues that arise with the CVM method are:

  • Hypothetical Bias – Difference in actual willingness to pay and willingness to pay revealed in a survey arising from the fact that in actual markets purchasers suffer real costs, while in surveys they do not.
  • Information Bias – Distorted evaluation of information.
  • Strategic Bias – Causes survey results to differ from actual willingness to pay because individual have an incentive to not reveal the truth because they can secure a benefit in excess of the costs they have to pay. This arises from the free rider problem.
  • Discrepancy between WTP and WTA
  • Choice of response mode – Open ended or closed questions, protest answers, ignoring income constraints etc.
  • Voluntary versus Forced payments – Compensation issues.

b. Choice Experiments (CE)

In a choice experiment, individuals are given a hypothetical setting and asked to choose their preferred alternative among several alternatives in a choice set, and they are usually asked to perform a sequence of such choices. Each alternative is described by a number of attributes or characteristics. A monetary value is included as one of the attributes, along with other attributes of importance, when describing the profile of the alternative presented. Thus, when individuals make their choice, they implicitly make trade-offs between the levels of the attributes in the different alternatives presented in a choice set. This enables the researcher to derive the value of each of the different attributes of a particular alternative (Alpizar, Carlsson and Martinsson, 2001). CE involves considerable effort in the design of relevant scenarios with appropriate attributes and in the use of statistical methods.

Using CE, the WTP for specific “attributes” of the proposed environmental change or alternative can be derived. This disaggregation allows for the possibility of compensating the some attributes of the situational change in kind and others monetarily (Adamowicz et al., 2005). CE also enables much greater accuracy in framing the final alternative.

There are three important advantages that CE has over CVM (Alpizar, Carlsson and Martinsson, 2001): (i) reduction in some of the potential biases of CVM (ii) more information is elicited from the respondent compared to CVM and (iii) the potential of testing for internal consistency. The only major disadvantage of CE is that is it far more complex and expensive to administer compared to CVM.

(III) Other methods

Dose Response based Valuation

This is an indirect procedure of valuating environmental costs and benefits. Dose Response method analysis the relationship between say, pollution and an effect it has, for instance, health effects. It is the process of characterizing the relationship between the dose of an agent administered, and the occurrence of an adverse health effect amongst the exposed. The incidence of the effect is then estimated as a function of human exposure to the agent. ‘Dose’ indicates the amount of the agent while ‘response’ refers to the effect of the agent once administered. Dose-response relationships are determined graphically by determining the effect of varying the administered dose on the response. Generally, increasing the dose of a harmful agent will result in a proportional increase in both the incidence of an adverse effect as well as the severity of the effect. Dose Response method is usually administered when the exposed population is unaware of the effects of pollution because it is not direct; it is also employed in developing countries where there is lack of data for such valuation methods.

Benefits Transfer

As valuation exercises are costly, researchers need some means of estimating non-market benefits without always having to undertake an individual study. Benefits Transfer is looked at as a way to make environmental valuation a standardized component of environmental Cost Benefit Analysis for policy making and environmental management. Benefits Transfer mainly works by taking estimates from one or more original studies, and transferring the results to a new context by adjusting for two factors: (a) differing socio-economic characteristics of beneficiaries, and (b) differing environmental characteristics of the two different contexts. There are two main approaches to benefit transfers:

  1. Transfer of adjusted mean WTP values eg. Fishing – average mean WTP per fishing day.
  2. Transfer of benefit functions, eg. Transfer bid curves estimated from other studies.

Usually, a meta-analysis (a statistical analysis of past valuation studies) is carried out. The transfer error is usually between 20-40% for the first method (absolute transfer error) and can go up to 228% for the second method (benefit function transfer error).

Conclusion

Environmental valuation techniques are primarily driven by the principle that individuals are self-interested and demonstrate preferences that form the basis of market interactions. Existence values are not demonstrated in the marketplace and are at least somewhat based on unselfish motives making them problematic to environmental analysts. To quantify existence values accurately within the framework of environmental valuation is difficult; for example revealed preference methods, such as the travel cost method and hedonic pricing methods, measure the demand for the environmental resource by measuring the demand for associated market goods. Existence values are not adequately captured using these methods. Existence values are best revealed through surveys of individual willingness to pay for the environmental resource or willingness to accept compensation for environmental losses.

References

  1. Portney, Paul R., The Contingent Valuation Debate: Why Economists Should Care. The Journal of Economic Perspectives, Vol. 8, No. 4, pp 3-17, 1994.
  2. Cropper M., Has Economic Research Answered the Needs of Environmental Policy?. Journal of Environmental Economics and Management, Vol. 39, pp 328-350, 2000.
  3. Pearce D., Cost Benefit Analysis and Environmental Policy. Oxford Review of Economic Policy, Vol. 14, No. 4, pp 84-100, 1998.
  4. Markandya A., The value of the environment: a state of the art survey, The Earthscan reader in environmental economics, 1992
  5. Kolstad C., Chapter 16 in Environmental Economics, 1999.
  6. Hanley, N., J. Shogren, and B. White. Chapter 11 in Environmental Economics in Theory and Practice, 2007.
  7. Adamowicz, Wiktor et al., Stated Preference Methods for Measuring Passive Use Values: Choice Experiments versus Contingent Valuation. Staff Papers, University of Alberta, 1995.
  8. Alpizar F., Carlsson F. and Martinsson P., Using Choice Experiments for Non-market Valuation. Working Papers in Economic Issues, Vol. 8, pp 83-110, 2005.
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Sustainable Development

Definitional Issues

With the emphasis on looking at human beings in a larger system increasing within academia, one question that arose was whether mankind’s consumption of the Earth’s resources was endangering the possibilities open to future generations (Arrow et al, 2004). This question is the basis of the development of the concept of ‘Sustainable Development.’ The concept has been gaining importance since the 1980s, and became a political buzzword with the United Nations’ 1992 Rio Conference on the Environment.

One of the first and best-known definitions of Sustainable Development is that given by the Brundtland Commission in its World report – Our Common Future (World Commission on Environment and Development, 1987) – which states that Sustainable Development is “development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs.” (as quoted in Hanley et al, 2006) Yet another definition is that given by Geir Asheim in a World Bank publication in 1994: Sustainable Development is “a requirement to our generation to manage the resource base such that the average quality of life we ensure ourselves can potentially be shared by all future generations.” (ibid) These definitions seem to imply the necessity for equity across generations, rather than just within.

While the above gives us an idea of what Sustainable Development is, it doesn’t tell us why we need to worry about future generations. On this count, there are two lines of reasoning. One takes a utilitarian approach, with social welfare encompassing the discounted sum of well-being of all people in society over time. The other is a Kantian approach – that future generations have a moral right to a level of well-being no less than ours.

The next aspect of Sustainable Development is what defines a sustainable development path. Here, again, there are two views. The first is the Outcomes approach where the criterion is that the utility (well-being) of a representative agent in any period be non-declining. The second is the Resources approach, where the focus is on maintaining the means (resources) which are available to society to generate well-being or consumption. This includes all forms of capital – physical, human, natural and social.

The Resources approach also brings us to a central debate within the field – whether these different forms of capital can substitute each other, and if so, to what extent? In other words, can a reduction in natural capital be substituted with an increase in levels of physical or human capital? Stemming from this debate, are two schools of thought within sustainability studies – one that maintains that the different forms of capital are substitutable and the other that maintains that they are not. Sustainability measures and discussions which focus on the former are categorized under Weak Sustainability and those under the latter are Strong Sustainability.

Weak Sustainability, Strong Sustainability, Carrying Capacity

It is economists of the Neo-Classical bent who primarily prescribe the weak sustainability rules. Weak Sustainability requires that the real value of all kinds of capital stock be non-declining. Thus, implicit in this is that the different forms of capital are substitutable, and that as long as losses in natural capital stock can be offset by gains in physical or human capital, development can still be sustainable. Part of this derives from a paper by John Hartwick in 1977, where he showed that, as long as the total stock of capital did not decline over time, non-declining consumption was possible.

However, this view is not without its critics. What Weak Sustainability does not consider is that individuals may derive utility directly from the environment, without viewing it as an input to production; that this would hold only in a closed economy, once trade starts, resource poor countries will need to invest more than richer countries to maintain sustainability; and that this view is not consistent with ecological sustainability, “defined to be the property of ecosystems to maintain their functioning in the presence of external shocks”. (Haley et al, 2006)

Strong Sustainability, on the other hand, is an Ecological Economics view. Here, the different forms of capital are not substitutable and therefore some part of the stock of Natural Capital has to be prevented from declining. This could be either the existing level, or the level consistent with maintaining some critical level (Kn) of natural capital, or some level in between these two. The reason for this is that not all natural resources are substitutable, some are also essential for human survival, and finally, natural systems are often inclined to have hysteresis and tipping points where stocks lost cannot be re-gained.

To ensure strong sustainability, Daly (1990) prescribed certain operational principles for strong sustainability: Renewable resources such as fish, forests and game should be harvested at levels no greater that the population rate of growth; degradable pollutants should be discharged at rates no greater than the ecosystem’s assimilative capacity; cumulative pollutants should be at discharges close to zero. For non-renewable resources, he suggests that the receipts from extraction be divided into an income and investment stream, with the investment stream invested in renewable substitutes and only the income stream being available for consumption.

Another concept that is prominent within ecological economics is that of system resilience, which refers to the ability of the main processes within an ecosystem to remain functional in the presence of exogenous shocks. Maintaining resilience would include maintain biodiversity and since it maintains system functioning over time, it can be viewed as a Sustainable Development strategy.

As we move away from staunch economics views, incorporating more ecological concepts, we come to yet another concept from Ecology – that of Carrying Capacity, which is “a measure of the amount of renewable resources in the environment in units of the number of organisms these resources can support.” (Daily and Ehrlich, 1992) Thus, being a function of characteristics of both, the area and the organism, a larger or richer area, other things constant, will have a higher carrying capacity. Thus, this concept also indicates to us that technological achievements cannot make biophysical carrying capacity infinite.

Issues around Indicators and Assessment of Sustainability

A second set of issues that have emerged in sustainability studies, besides the above of ‘imagining’ or defining sustainability, are that of measuring whether we are sustainable or not. This implies the development of indicators to judge the sustainability of current consumption patterns and resource use. As is obvious, weak and strong sustainability rules demand different indicators, and the debate over definitions of sustainability has inevitably spilled over to the development of indicators for sustainability.

One of the first approaches in this regard, as also the most commonly used, is that of Green GDP, or incorporating environmental inputs in the National Income Accounts of a society. This approach puts a value to environmental inputs which are not priced by market processes (ecosystem services, for instance) and adds them to the value of final goods and services produced within an economy. It also subtracts the depreciation in the stock of natural resources (alternatively, natural capital Kn) from the National Income, to arrive at the level of GDP after accounting for degradation in environmental resources and including the value of unpriced environmental benefits.

A similar approach is to construct the indicator of ‘Genuine Savings’, which assumes the Weak Sustainability criterion that forms of capital are substitutable, and hence compares the investment in the stock of  capital in an economy with the depreciation in all forms of capital. If the Genuine Savings indicator is negative, then one can say that the investment in capital is less than the depreciation of capital, and hence the economy is unsustainable. Subject to data availability, one can also use the Genuine Savings indicator to compare economies over time and with each other – economies with higher Genuine Savings will be more sustainable than the others.

Since Genuine Savings and Green National Income Accounting are indicators of weak sustainability, they have to bear the same set of criticisms as the latter. On the other hand, the creation of indicators for strong sustainability rules as well as the assessments of sustainability have been fraught with difficulties, with the task having proved to be much more difficult than what was earlier thought.

The development of the ecological footprint, however, has helped create an indicator which can be easily understood by people and which can be calculated for individuals as well as economies. The Ecological Footprint, in this approach, is defined as the resource consumption and waste assimilation requirements of a given individual, population or economy in terms of the corresponding land area. Ecological Footprint, being an intuitive concept, has been challenged to be unscientific, and it has been questioned whether all the forms of resource consumption can be turned into a corresponding figure for land-use.

A slightly different approach is the ‘distance to goal’ approach – this approach estimates the adjustment required in the Net National Product to account for the cost of reaching environmental goals – in other words, the amount of spending (or loss in consumption) which a society may have to bear in order to reach certain environmental goals. Based on the specific environmental goal to be achieved, different ‘distance to goal’ approaches can be constructed.

Arrow et. al. (2004) evaluated consumption levels according to two criteria – the discounted present value of the utility stream (using the maximize present value criterion) and the maintenance or improvement of intertemporal social welfare (the sustainability criterion) for a large number of developed and developing countries. Their findings, though revealing, were also somewhat scary. According to the authors, “Several nations are failing to meet a sustainability criterion: their investments in human and manufactured capital are not sufficient to offset the depletion of natural capital” and the “investment problem seems most acute in some of the poorest countries of the world”.

While the uninitiated observer may, at first glance, come to the conclusion that the divide between the strong and the weak sustainability definitions is too large to be bridged, a closer look at the literature reveals that there is increasingly an understanding between the two sides, and the answer seems to lie somewhere in between – some forms of natural capital are substitutable, while others are clearly not. Accordingly, the attention has shifted to find out which forms of natural capital are substitutable (and to what extent) as well the development of hybrid assessments of sustainability – notable among these is Arrow et al (2004) and World Bank (1997).

References:

  1. Hanley, N., J. Shogren, and B. White. Chap. 1 in Environmental Economics in Theory and Practice, Palgrave, London: 2007
  2. Costanza, Robert and Patten, Bernard, C. Defining and Predicting Sustainability. Ecological Economics 15 (1995) 193-196
  3. Daily, Gretchen C. and Ehrlich, Paul R. Population, Sustainability and Earth’s Carrying Capacity. BioScience, Vol. 42, No. 10, pp 761-771
  4. Expanding the Measure of Wealth: Indicators of Environmentally Sustainable Development. World Bank: 1997.
  5. Tietenberg, Thomas. Chapter 5 in Environmental Economics and Policy.
  6. Arrow, Kenneth; Dasgupta, Partha; Goulder, Lawrence; Ehrlich, Paul; Heal, Geoffrey; Levin, Simon; Mäler, Karl-Göran; Schneider, Stephan; Starrett, David; Walker, Brian. Are We Consuming Too Much? The Journal of Economic Perspectives, Vol. 18, No. 3., pp. 147-172.

The Economy and the Environment

Environmental economics developed as a discipline following the realization that economic theorizing needs to consider the greater system which affects human beings. Being greatly influenced by systems thinking, the need was felt for a paradigm shift in the whole perspective within which economic theory was placed. The genesis of the subject can also be traced to the widespread social and ecological movements of the sixties and seventies which brought environmental issues to the fore.

There is an indispensible nexus between the economy and the environment – changes in one have implications on the other. The economy being a subset of the ecosystem, economy-environment interactions require one to account for both adaptation and feedback within and between systems. There exist a multitude of roles for the environment with respect to the economy, as a supplier of resources, sink for waste products, supplier of amenities and provider of global life support services. This article is an attempt to highlight the interconnection and feedback mechanism which characterizes the linkages between the economy and the wider environment, within the context of debates on economic growth.

The 1972 MIT study on The Limits to Growth, which highlighted the environmental and resource problems that economic growth had brought in its wake, sparked off a major debate between the mainstream neoclassical economists and ecological economists. While the former were optimistic on the future growth prospects, based on an extrapolation from the past, the latter drew attention to the limits to economic growth posed by nature.

These limits as identified by the ecological economists include the biophysical and ethico-social limits the economic world confronts. Biophysical limits are backed by three important conditions – finitude, entropy and complex interdependence. The first two are backed by the laws of thermodynamics and when examined together with the complex interdependence (visible and invisible) of all the factors, provide a convincing argument to the existence of biophysical limits. On the other hand, ethico-social limits are fundamentally normative and thus are dependent on the context and social fabric of nations.

“Growth is widely thought to be the panacea for all the major economic ills of the modern world” (Daly, 2005). This is the stance of the optimists who believe that all problems including poverty, unemployment, overpopulation and environmental degradation, can be solved by increasing economic growth. With specific reference to the costs imposed on the environment, the argument advanced in favour of growth is that higher growth will enable us to tackle environmental concerns, through newer resource discoveries and control of pollution.

In this context, it is worth examining the Environmental Kuznets curve which presents an inverse U shaped relation between an environmental impact indicator like pollution and income per capita. Though in the early stages of economic growth, environmental degradation increases, after a certain threshold level in income per capita the trend reverses. We must exercise caution when we use the Kuznets curve, for though this relation holds for many urban pollutants, it fails to hold true for natural resource use and biodiversity conservation. Also, this implicitly assumes that environmental damage has a certain character of reversibility, when in reality we would not be able to restore the environment to its original state in many situations.

As strong advocates of the ‘rebound effect’, the growth optimists believe that technological progress will lead to systematic behavioural responses – new technology will lead to improved efficiency levels, bringing down costs and prices, boosting demand and thereby increasing investment and supply. This in turn leads to further cost reductions, thus maintaining the growth momentum of the past. However, this engine of growth was sustained largely by the natural resources it drew from the environment. Now, when we consider the possibility of exhaustion of these natural resources, we note that one of the most important constituents in the feedback cycle gets derailed – the element of cost. As raw materials become scarce, they become increasingly expensive, posing a threat to the belief in unending growth.

In this neo-classical framework, the economy is seen as a closed system without any links to the outside world. Technology is seen as a key driver of growth – to overcome resource limitations, aid in the discovery of new resources and play a key role in solving major environmental problems. This position comes under attack from those sceptical of indefinite exponential growth, recognizing the finite carrying capacity of earth. They draw attention to the whole host of environmental problems the growth mania has brought with it, which raise concerns on the sustainability of future growth. This environmental degradation can be seen as an iatrogenic disease (Daly, 1992), the resultant prescription of unlimited growth.  The ecological economists note that the issue at hand is not merely absolute limits on the availability of resources but also the environmental implications of increased resource discovery. In their view, technology is not always a problem solver.

A country’s Gross Domestic Product (GDP) is seen by the optimists to be the ultimate measure of well being. However, mainstream economists need to keep in mind that GDP is only a measure of overall economic activity, and not well being. GDP ignores problems of growing inequality, poverty, social unrest and justice. Besides, GDP not only fails to consider the environmental degradation and the depreciation of man-made capital but also ironically includes – rather than exclude – expenses which we incur to protect ourselves from negative externalities like pollution. This hyper-growth mania (Daly, 1992) underscores the fact that GDP is a misleading indicator of economic growth.

Further, happiness studies reveal that increased growth as measured in terms of increased GDP doesn’t translate into happiness and well being. The correlation between absolute growth and happiness holds only up to a certain threshold, beyond which only relative changes in income bear significance. Thus, being a zero-sum game, these relative changes do not alter the economy’s aggregate well being.

The classic economic argument that economic growth will make everyone better off in the long run, does not hold good any longer. The trickle-down effect advocated by the growth optimists does not work towards ameliorating poverty. Poverty exists despite economic growth because what grows is the reinvested surplus, and the benefits of growth go to the owners of the surplus who are definitely not poor. GDP growth and welfare are, thus, not synonymous – the argument that economic welfare leads to total welfare is a fallacy.

Acknowledging the limitations of GDP as a measure of well being, an alternative indicator like wealth per capita has been advocated by Partha Dasgupta. Understanding wealth as encompassing an economy’s entire productive base, institutional structure, knowledge and skills, wealth per capita is a better indicator of economic development.

Akin to a saturation point, Daly’s innovative concept of uneconomic growth describes the situation of an undesirable balance of utility and disutility (Daly, 2005). The point of balance between marginal utility and marginal disutility gives rise to the optimal scale of consumption and any increase beyond this point sets in a phase of uneconomic growth, when marginal disutility exceeds marginal utility.

The era of uneconomic growth reaches its futility limit as marginal utility converges to zero, with no additional utility to be gained from increased consumption. Society eventually faces an ecological catastrophe as marginal disutility continues to increase. Daly’s steady state economy, with zero economic growth poses an alternative to the conventional ever growing economy which faces the threat of reaching its futility limit.

Though mainstream economists dismiss sustainability as a fad, the concept of sustainability shifts the path of progress from growth, as defined in mere quantitative terms to development which signifies the qualitative improvements in well being. Sustainable economies signify an indefinite development trajectory, with a finite growth horizon. This transition from a growth economy to a steady state economy is quintessential to achieve sustainable development.

References:

(1) Ayres, Robert U. Turning point: The end of exponential growth? Technological Forecasting & Social Change. Vol 73, 2006. pp. 1188–1203.

(2) Daly, Herman. The Economic Growth Debate. Journal of Environmental Economics and Management. Vol 14, 1987. pp. 323-336.

(3) — “A Catechism of Growth Fallacies,” Chap. 5 in Steady-State Economics: Second Edition with New Essays, Washington: Island Press, 1991.

(4) — Economics in a Full World. Scientific American. September 2005.

(5) Hanley, N., J. Shogren, and B. White. Chap. 1 in Environmental Economics in Theory and Practice, Palgrave, London: 2007.

(6) Harris, Jonathan M. Chap. 1 and 2 in Environmental and Natural Resource Economics: A Contemporary Approach, 2006.