The simple analytics of developing resources from resources

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5 March 2018

We show that the social desirability of a resource substitute systematically depends on the pattern of resources—either renewable (RR) or non-renewable (NRR)—involved in the resource substitute development program. Developing a RR in an NRR-based economy is particularly rewarding because the part of the NRR stock, which would be consumed in the absence of the RR substitute, provides funding for the development program. A RR-based economy is more demanding than a NRR-based one because (i) it feels richer since its consumption is not doomed to decline, and (ii) its sacrifice, in terms of foregone consumption during the investment phase, cannot be managed and reduced with the same flexibility as in a NRR-based economy, which is freer in shifting resource use across time. Thus the larger the willingness to smooth consumption, the greater is the investment in the NRR-based economy, the smaller in the RR-based one.