Question

What are the limitations of using measures of physical scarcity such as the “exponential exhaustion index” that was developed by the Meadows in the book Limits to Growth published in 1972? What is the “Hotelling efficiency rule” and how does it relate to the “socially optimal” level of depletion of an exhaustible resource? Do you think that markets can be relied upon to allocate exhaustible resources over time to maximize soxiety's welfare? If not, what alternative mechanisms should be used?

Answer 1

Food, resources and a healthy environment are necessary for exponential growth. Social factors affects the growth even the resources are abundant. Food prices are risisng so high that some people are starving and others are forced to lower the quantity in their diets. As pollution increases and industrial input into agriculture falls, food production per capita falls. Its essentially resource constraints that leads to global collpase.

The "Hotelling efficiency rule" assumes that the markets are efficient and the owners of the non-renewable resources are motivated by profit. As non renewable resources like oil, gas and coal, minerals, copper, etc. are formed by geological processes and are in fixed stocks which, once extracted, cannot be renewed, the owners keep their resources for a better price/profits.

There should be optimal allocation of valuable exhaustible resources in order to maximize society's welfare. As an alternative there should be trade-off between environmental quality and resource depletion and waste generated by the economic process. Therefore society must optimally allocate output between consumption and services to improve the environment and choose between increased capital accumulation and environmental degradation.