Sustainability and Intergenerational Equity with Varying Discount Rate: The Case of Renewable Resource

Abstract:     
The relationship between natural resource exploitation and the discount rate in economic theory is well documented. The discount rate is deemed to influence resource utilization such that a higher discount rate will speed up natural resource exploitation in market oriented economy and a lowering rate will act otherwise. This fact is proven mathematically and is known as the Hotlling lemma. Basically an optimal utilization of renewable natural resource is attained when its growth rate per time is equated to the existing discount rate. The current study attempts to establish the fact that discount rate which is used as the discounting factor in dynamic optimization is technically useful for the attainment of production sustainability of a renewable resource. However, it has a far reaching economic and environmental implication in terms of resource distribution pertaining to the equity issue between the present and future generation. The finding seems to suggest that higher discount rate would favor greater exploitation of resource, thus raises the issue of resource sustainability in long run. Using panel data from forestry resource the linear fixed and random effect demand functions were estimated. A simplified dynamic optimization technique was then applied with the objective to investigate the impact of varying discount rate on the renewable forestry resource and thus the distribution of natural resource in the light of intergenerational equity distributional issue. The mathematical objective of intertemporal optimization equity issue is to maximize the net social benefit between the economic and environmental benefits and costs. Environmental degradation which tends to increase following intensity of resource exploitation was observed.

Number of Pages in PDF File: 10

Keywords: discount rate, natural resource use, intergenerational justice, intertemporal optimization and sustainability

Accepted Paper Series