EFFICIENCY AND

SUSTAINABILITY
Sukhdeep Singh
 DISCOUNT RATE
 Rationale
 Inflation
 Opportunity cost
 Uncertainty and Risk
 Money received today is considered more valuable than money received in future

 Practice of discounting is controversial  Basically, we are putting a higher value on current

output than future output
 Some argue that the idea of discounting is anti-conservationist
 Low discount rates (for instance in the case of dam construction) lead to faster economic
growth  more consumption of natural resources in future
 EFFICIENCY
 Efficiency: The quality or degree of being efficient; the ability to produce without wasting any
kind of resources
 Positive vs normative economics
 Types of efficiency

 Static efficiency – related to a single time period  no consequences in the future (e.g. if efficiency is
measured based on the use of land for a crop sown and harvested in a particular year or use of river
water in a year)

 Dynamic efficiency/Intertemporal efficiency – related to present and future time periods  will have
consequences in future (e.g. if efficiency is measured based on cutting of trees in a year or extraction
of coal/petroleum)
STATIC EFFICIENCY
 MSB  Marginal Social Benefits (aggregate of
marginal willingness to pay of all the people)
 MSC Marginal Social Costs (aggregate of marginal
costs (MC))
 The output level is socially efficient and yields
maximum net benefits
 Total Social Benefits: Total benefits-value of resources
used (area a + b at quantity = )
 Net Social Benefits: = Area ((a+b)-b)
 Net Social Benefit is maximum at
 NSB at any other level of quantity will be less than what
NSB is at
 For Example, NSB at = Total Benefit-Total Cost

= (a+b+d)-(b+c+d) = a - c which is less than NSB at

DYNAMIC OR
INTERTEMPORAL EFFICIENCY
 Analysis of benefits & costs is not limited only to the present but is extended to the future as
well
 Dynamic efficiency requires choosing a series of output quantities, not just one like we did in
the case of static efficiency
 The criteria should be to choose a time series of output levels that gives the maximum
present value of net benefits
 Trade-off between net benefits in the present and future uses  decisions that increase net
benefits in the present may reduce net benefits in the future
DYNAMIC OR
INTERTEMPORAL EFFICIENCY
 Calculating the present value of net benefits:

Or if we are referring or one unit change in the rate of resource use in the present:

Change in the = Change in - Change in costs of the + Change in discounted value

present value of benefits of present present period (MCC; of future net benefits (UC;
net benefits (MNB) period (MB) where MCC is where UC=user cost)
marginal current cost)
DYNAMIC OR
INTERTEMPORAL EFFICIENCY
 User costs are zero if the present output does not
have future consequences (a static situation, such as
river water usage)
 However, in situations where user costs are positive
(such as coal extraction), the output is decided such
that marginal willingness to pay is equal to the sum
of present marginal costs and user costs
 For instance, in the figure, marginal total cost
(MTC) and marginal current benefits (MCB) decide
as the intertemporal efficient rate of output
 User cost here accounts for future consequences of
present resource-related decisions  this implies
that the greater the UC is, the more will be the
divergence between MCC and MTC
DYNAMIC OR
INTERTEMPORAL EFFICIENCY
 NATURAL RESOURCE RENTS
 In situ price of a natural resource is its price as situated in the natural world (e.g. stumpage
price is in situ price, while timber price is not as it includes the cost of transportation as well)
 In situ price is also called resource rent which implies that in situ price is the value of a
resource that nature itself has made available
 THE ISSUE OF
SUSTAINABILITY
 Sustainability: deals with balancing the interests of present and future generations
 Sustainable development: development that meets the need of the present without compromising the ability of future generations to
meet their own needs  future generations should not have fewer supplies than the present generation
 If it is related to the physical supply of resources, the issue is valid in the case of renewable resources
 However, in the case of non-renewable, the resources must face reduced supply in future if there is positive extraction in the present
(conflict with sustainability definition)
 Alternatively, we can allow for interpretation of sustainability in terms of preservation of total natural resources instead of individual
resources (addition in renewable can compensate for the loss of non-renewables)
 Problem of finding exchange ratios of units (e.g. how much of preserved forest is comparable to a given quantity of extracted coal)
 As a solution, we can use values instead of quantities of resources
 Using values may also have shortcomings as the comparison made may not always refer to increased human welfare (e.g. this notion of
sustainability is not applicable to political jurisdictions in some cases; some countries may be well endowed with natural resources than
others)
 A better approach could be to understand sustainability in a broad sense: Human welfare is based on natural resources, human capital
and produced capital (will fit in most political settings; any reduction in non-renewable resources can be offset by any other productive
resources)