Optimal Growth, Uncertain Future Preferences and Preservation

• Main Author: Brasao, Ana
• Publication Date: 1998
• Other Authors: Cunha-e-Sá, Maria A.
• Format: Article
• Language: eng
• Source: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Download full: http://hdl.handle.net/10362/89026

An important problem in environmental economics concerns the preservation of natural environments. As current actions affect future utility, that is the level of utility of future generations, their well-being depends a great deal on how they value those assets. In this paper, the impact of resource amenity values on the optimal growth of an economy that depends upon those resources for the production of goods and services is examined. In particular, we examine the conditions under which it is optimal to preserve the environmental asset, in the context of a capital-resource growth model when there is uncertainty about future preferences. Focusing on the case in which the elasticity of substitution between cap-ital and the resource input is greater than the inverse of the elasticity of the marginal utility of consumption, that is σε > 1, with ε,σ > 1, as in Krautkraemer (1985), we show that, in the presence of uncertain future preferences, the results on optimal preservation depend on the asymptotic value of the marginal productivity of capital. When capital is asymptotically more productive when preferences favor more preservation rather than when they favor it less, after uncertainty is resolved, then the larger the preference for more preservation the more likely it is to be more conservative rather than in the deterministic case, and vice-versa. This result may be overturned when capital is asymptotically more productive when preferences favor less preservation, after uncertainty is resolved. Therefore, previous results in the literature of optimal growth are extended to this particular stochastic environment.