Pareto Optimality in the Extraction of Fossil Fuels and the Greenhouse Effect: A Note

Hans-Werner Sinn

NBER Working Paper No. 13453
Issued in September 2007
NBER Program(s):   EEE   PE

This note generalizes the Solow-Stiglitz efficiency condition for natural resources to the problem of fossil fuel extraction with a greenhouse effect. The generalized optimality condition suggests that the greenhouse effect implies overextraction in the sense of leaving future generations a wrongly composed wealth portfolio with too few natural resources relative to man-made capital. This judgment is independent of society's ethical preferences concerning the well-being of future generations.

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