Introduction to Environmental Economics

Page 2:  Equilibrium

The following quote from P. K. Rao is the central theme of this report and will be discussed here in terms of economic equilibrium:

“Some authors suggest that a free market oriented economic approach to sustainability could incorporate the importance of the environment. They argue that if the features of the environment…reflect adversely on the health of the economy and other systems, the economy will receive the feedbacks to adjust itself… Even if this position is accepted, the time frame over which the self-correction feedbacks might happen is not expected to be synonymous with that relevant to preserve the ecosystem resilience. The attainment of such a pseudo-sustainability could be consistent with massive environmental degradation.”
P. K. Rao, Sustainable Development, p. 87-88

As Rao states, “Even if this position is accepted” may itself not even be tenable. The problem with that position is that it assumes an economic equilibrium is possible valuing environmental resources.

However, the history of economics shows that infinite numbers of economic equilibriums are possible, and any possible single equilibrium may stick and prevent other equilibriums from being allowed to occur.

Hence, the problem may not simply be that valuing environmental (or other) resources takes too long, but rather that such valuing may never happen.

“it is possible for an economy to be in equilibrium (according to commonly used models) and for massive problems to exist: high levels of unemployment, great disparities in income and wealth, life-threatening pollution and the failure to provide essential goods and services to those who need and want them.”
Peter Dorman, Microeconomics: A Fresh Start, p. 47
“The major conclusion of Keynes’ argument — the one of greatest general importance and the one that is relevant here — is that depression and unemployment are in no sense abnormal. (Neither, although the point is made less explicitly, is inflation.) On the contrary, the economy can find its equilibrium at any level of performance.”
John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power, p. 69

Economic equilibriums have varying degrees of efficiency, depending on who an equilibrium is efficient for. Economic equilibriums are formed by bilateral monopolies of countervailing powers.

Bilateral Monopoly

Bilateral monopoly refers to two parties transacting orthogonal to (independent of) third parties, originally labor and management indpendent of consumers (now any groups/parties), and refers to networks of such monopolies.

[+] Show OECD definition of Bilateral Monopoly

Countervailing power may benefit third parties (such bilateral monopolies are called “social capital”), but under accumulated microeconomic duress bilateral monopolies may (and do) disadvantage third parties (Galbraith, p. 190–192; in more recent economics texts referred to as “external costs”). More effort is possible to develop countervailing bilateral monopolies to reduce disadvantage to third parties including the environment.

“The existence of ‘bad’ social capital only strengthens the case for analysing how ‘good’ social capital comes into being and how it can be created. Problems of measurement do not preclude qualitative analysis; many other important development issues share this problem.”
Sanjaya Lall, “Social Capital and Industrial Transformation” in Capacity for Development, p. 104

[+] Show more information about Social Capital

“Social capital may be ineffective if groups grow beyond a certain size or pursue multiple objectives.”
Sanjaya Lall, “Social Capital and Industrial Transformation” in Capacity for Development, p. 104

Under inflation (high cost of living) countervailing powers (bilateral monopoly partners in an economy) are incentivized to inflate (exaggerate) their suitability and usefulness, corrupting the bilateral monopoly (and the economy).

“What is beautiful in an economy is not smallness as such, any more than bigness. It is a mix of firms of many sizes, each performing the task that suits its size best.”
Heilbroner & Thurow, Economics Explained, p. 172

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