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Irreversibility and uncertainty cause an intergenerational equity-efficiency trade-off

Nikolai Hoberg and Stefan Baumgärtner

Ecological Economics, 2017, vol. 131, issue C, 75-86

Abstract: Two important policy goals in intergenerational problems are Pareto-efficiency and sustainability, i.e. intergenerational equity. We demonstrate that the pursuit of these goals is subject to an intergenerational equity-efficiency trade-off. Our analysis highlights two salient characteristics of intergenerational problems and policy: (i) temporal irreversibility, i.e. the inability to revise one's past actions; and (ii) uncertainty of future consequences of present actions in human-environment systems. We employ a two-non-overlapping-generations model that combines an intragenerational production decision on the use of circulating capital and a non-renewable resource, with a negative intergenerational externality as an unforeseen contingency. If initially unknown problems become apparent and policy is enacted after irreversible actions were taken, policy-making faces a fundamental trade-off between ex-post Pareto-efficiency and sustainability. That is, one can achieve either one of these two goals, but not both.

Keywords: Climate change; Closed ignorance; Intergenerational equity-efficiency trade-off; Irreversibility; Pareto-efficiency; Sustainability; Unawareness (search for similar items in EconPapers)
JEL-codes: D3 H23 Q01 Q38 Q56 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.ecolecon.2016.08.015

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