Natural Capital: The Quest for Sustainability

This paper analyzes the problem of social accounting of natural resources, focusing on growth and sustainability. The paper re-examines the welfare economic foundations of social accounting by using the economic framework of neoclassical growth theory and shows that the dynamics and measurement of natural capital can be integrated within a general dynamic model of the economy, with a view to measuring sustainability both within and out of optimal (first best) conditions. Two novel results are presented with respect to the existing literature. First, it is shown that externalities and market distortions reduce final demand for goods and services, thus constraining the economy to lower paths of growth. As a consequence, non-optimality of growth may be due both to failed alignment between demand and supply for each point of the growth trajectory and to the choice of a sub-optimal rate of growth. Second, shadow prices of both physical and natural capital can be specified and estimated considering of both second-best conditions. The combination of these two conditions implies a steady state whose sustainability depends on the balance between consumption and ecosystem use for physical capital and between regeneration and extraction for natural capital.