1.4 Sustainability and individual rationality

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So far, we have essentially described the conditions under which the resource base of an economy can be physically preserved and the social rationale for a conservationist policy. We have therefore ignored the conditions under which environmental reproducibility is optimal for an individual agent.

In actual fact, there are frequent circumstances in which it is individually rational to degrade a natural resource. This may or may not run counter to collective rationality. For instance, agents who live close to their subsistence level and have no alternative income-earning opportunities, are concerned that the income they derive from the exploitation of the resource meets their subsistence requirement in each period. If the conservation of the resource involves costly investments that have a long gestation period (think of many agro-forestry practices), it may happen that they are not able to bear such a sacrifice. Subsistence constraints may therefore drive people to draw down the resource to a shut-down point. Note carefully that there are two conditions for this proposition to hold true. First, capital markets must be imperfect with the effect that the agents are not able to obtain loans which would help them to undertake the necessary investments. Second, the market for the resource must also be imperfect since, otherwise, the agents under a binding subsistence constraint would be better off by selling immediately their resource to a new owner who would make a better use of it.

Another important circumstance in which agents may be individually led to degrade a resource occurs when the rate of return on a conservation investment falls below the return achievable by allocating production factors to alternative uses. Striking illustrations of this situation are easy to find in the forestry and the fishery sectors where some species are longmaturing. Thus, there are some species of fish whose rate of growth is so slow that it is bound to be below the ruling rate of interest in any economy. For instance, the Orange Ruffy which are exploited in depth ranging from 700 to 1,400 metres (e.g. in New Zealand and Australian waters) reach maturity only at age 20 to 25 years and may live above one hundred years. Any private owner of such a resource has therefore an incentive to deplete it. Most sharks, to take a less exotic example, are also low-reproducing and there are few, if any, commercial shark fisheries which have not depleted the stocks (personal communication of Rolf Willmann). Resource depletion leading to extinction is an undesirable outcome if preservation of the resource produces positive external effects (biodiversity is a public good, of unknown and uncertain return, for which it is clear that no market exists) or if there are market imperfections that distort prices (for more details, see also Sect. 3.2 below).

From the above discussion, it should be evident that rational agents can have an incentive to degrade natural resources even when these resources are under private property. Following Pagiola ( 1993), let us consider the problem of soil conservation (in the same vein, see also Perrings, 1989). A producer cultivates a soil which has initially a given level of productivity and the higher the soil level the greater the output per unit of land area. A production input is applied to this soil and generates output according to a determinate production function describing the prevailing technology: the function has standard properties, including diminishing returns to the production input. Yet, applying this input causes damage to the soil, reducing its future level. Soil degradation and the consequent future losses of output are not inevitable, however, since a conservation input can also be applied with the effect of mitigating damage to soil. Use of the conservation input does not contribute to immediate production and, in fact, it even reduces it by diverting resources from directly productive activities. To put it in another way, conservation is costly in terms of both conservation expenditures and forgone revenues from production since production input use must be kept low. Finally, as there are diminishing returns to the conservation input, the soil level cannot be built up beyond a certain level.

If the farmer's strategy is such that damage caused to soil by using the production input is exactly offset by the mitigating effect of the conservation input, production can continue indefinitely: in this case, the optimal path converges to a long-run steady state. Conversely, as suggested above, it is also possible that the optimal path might lead the farmer to draw down his soil to the point that he is forced to shut down production: the resource is not conserved either because the farmer does not deem it worth while to do so or because he cannot bear the necessary cost. In the former case, the farmer has available to him alternative uses of his labour resource in the form of migration possibilities. If there is no market where to sell his land, he would then prefer to degrade it in order to reap the high returns from overexploitation and, thereafter, to switch to his off-farm alternative activity. In the latter case, he is confronted by a subsistence constraint and he cannot borrow or insure himself to meet basic consumption needs when his agricultural output falls short of these needs in any period. If the conservation strategy entails current (investment) expenditures or a less intensive use of the soil so that his subsistence constraint is violated, he cannot adopt this strategy even though it may be very profitable in the long run.

Let us represent graphically the two possible paths that have just been characterized. The vertical axis of Figure 1.4 measures discounted profits and, therefore, the area under the paths described can be interpreted as the net present value of returns from following the corresponding path. Note that, as drawn in this figure, the non-conservation path is initially more profitable than the conservation path. This may result from the fact that adoption of conservation practices requires an initial investment or use of less productive practices. Under the assumption that b stands for the alternative annual migration income (the alternative path is therefore calculated as e-rtb , where r represents the discount rate), the net present value of returns from following the conservation path is given by (B + E + C + D) while that achievable by following the path under which the resource is gradually destroyed is (A + B + E + D). T represents the shut-down point of the latter strategy. Whether the conservation or the non-conservation path is preferable from a net present value perspective therefore depends on whether. A is greater or smaller than C.

FIG. 1.4. Comparison of returns under conservation and non-conservation paths

As is evident from the above comparison, the role of b is crucial to determine whether the resource will be conserved or degraded: for example, if b is higher, the area C is reduced and, consequently, the probability that A exceeds C increases. This is an important implication of the present analysis: the higher the return on alternative uses of production factors, the more likely it is that the resource will not be conserved. Note, however, if the e-rtb curve is so high that it lies wholly above the non-conservation path, cultivation of the land will be given up from the very beginning and, consequently, the soil resource will not actually be degraded (the shut-down point coincides with the vertical axis). In such circumstances, the incomes from migration are so high that it is not even worth exploiting the land to the utmost until it is eventually depleted. Alternatively, b can be interpreted as the subsistence income of a farmer who has no alternative income-earning opportunities. In that case, the path e-rtb becomes a constraint. In the situation described in the diagram, the conservation path is clearly possible since it satisfies this constraint, and it is obviously preferred to the non-conservation strategy which destroys the resource on which the farmer crucially depends. This need not be so, though. Thus, if population increases, the subsistence requirement, b , rises in proportion to the number of dependents in the farmer's family and higher returns need to be extracted from each unit of land to maintain subsistence levels: the whole path e-rtb shifts upwards. At a certain point, it will move above the conservation path and destruction of the resource becomes inevitable: in this case, by adopting a shut-down practice that mines their available soil in order to obtain current consumption, poor farmers can at least postpone the inevitable (Pagiola, 1993: 87).

A rather unexpected result which emerges from a more formal analysis of the conservation issue (for more details, see Pagiola, 1993: ch. 5) is that the effect of a rise in output prices on conservation practices is ambiguous. True, such a rise enhances the future value of production, thereby encouraging conservation. Yet, on the other hand, it increases the value of the forgone production resulting from use of the conservation input and, consequently, it tends to induce the farmers to reallocate inputs from conservation to production purposes in the current period. Which effect dominates depends on how easily soil is damaged as a result of increased exploitation, what is the consequent effect on productivity, the cost of additional conservation, and the discount rate. Depending on site-specific biophysical conditions, price movements may either increase or decrease the incentives to degrade the soil (ibid. 83). A policy that aims at furthering conservation by supporting output prices is not, therefore, necessarily justified. By contrast, such uncertainty vanishes when the government chooses to subsidize the prices of conservation inputs.

Finally, Pagiola proposes a dynamic analysis in which the choice of the soil level by the farmer is explicitly modelled. An important result is the following: the resource exploitation strategy chosen by the farmer crucially depends on the initial conditions. More precisely, if initially the soil level is very low, adoption of a conservation strategy implies that the soil will first have to be built up to a level compatible with such a strategy in the long run. If this is not done, the soil will be inexorably degraded under the impact of continuous production operations. As long as returns at the steady state are sufficiently high that the conservation investment can be repaid, the adoption of the conservation strategy should not cause any problems. If farmers are facing a minimum subsistence constraint, however, the need to meet this constraint in every period may prevent them from following the conservation path. In the words of Pagiola, 'the need to meet a subsistence constraint in every period might prevent farmers from adopting sustainable practices even though these practices would ensure that farmers could meet their constraint in the long run' (Pagiola, 1993: 90). In these circumstances, public intervention is clearly required to support poor farmers in order that they can increase the quality of their soil and escape the aforedescribed low-level equilibrium trap. Towards this end, the State may have recourse to temporary income support policies, selective subsidies, and also measures aimed at improving poor farmers' access to credit markets.

On the other hand, the initial level of the soil may be so high (above the steady-state level) that it is not optimal for the farmer to maintain it. In other words, the optimal path may consist of allowing some degradation to occur since conservation, especially at such high levels of productivity, may entail high costs (not only direct costs but also costs that interfere with production efforts). In these circumstances, the short-term benefits from use of more degrading practices exceed the long-term costs resulting from a lower steady-state income level. As already pointed out in sect. 1, 'observing agricultural practices that degrade soil does not, therefore, necessarily imply that farmers have adopted unsustainable practices; they may simply be drawing down their soil stocks to their optimal long-run level' (Pagiola, 1993: 73).

Clearly, the conservationist attitude which claims that the stocks of natural resources ought to be maintained at their present level is hard to justify as a matter of principle. A conservation strategy does not imply adherence to such a rigid, conservationist policy which arbitrarily rests upon the assumption that the existing stocks are optimal in some sense. As stressed by Pagiola, the optimal solution for the farmer twill not necessarily be the solution with the highest long-run resource stock; nor will it necessarily meet or exceed any arbitrarily set level of the resource stock' (Pagiola, 1993: 46).

We have seen above that poor users may be unable to bear the cost of profitable conservation investments. It must now be added that in general they have much greater incentives to seek to conserve their resource base, since they have limited alternative income sources. In other words, the short-term returns from drawing down the resource to a shut-down point are unlikely to offset the long-run penalties from doing so. It is only if the short-term benefits from mining the resource are sufficiently high, if the future penalty from nonconservative behaviour is sufficiently distant, and if the discount rate is sufficiently high that subsistenee-constrained users might still prefer the shut-down strategy (ibid. 88).

On the other hand, it cannot be taken for granted that the initial productivity level of a resource is sufficiently high that it can be actually built up to the steady-state level, possibly with the financial support of the State: the biophysical environment may be so degraded and so fragile that production is not and will never be sustainable however important the conservation investments undertaken. These investments may be too costly or ineffective for the initial ecological imbalance to be redressed. Clearly, the biophysical characteristics of the resource matter and they interact with the economic parameters to determine whether conservation is a profitable strategy. Thus, the more fragile or the lower the quality of the resource base, the more sensitive production is to resource degradation, and the less effective conservation investments are, the more likely it is that adoption of shut-down practices will be optimal for the users, and the lower the long-run (steady-state) stock of the resource will be even under conservation practices (ibid. 85-6).

1.5 Conclusion

The following points deserve to be singled out for special emphasis at this concluding stage of the analysis.

First, high rates of resource exploitation, when resources are exhaustible, are not incompatible with a development process characterized by a sustainable consumption flow. At least, this is so under the realistic assumption of sufficient substitutability between these resources and capital assets.

Second, there are a number of serious reasons which may justify a conservationist policy. In particular, information on natural resources including future possible uses for them may be highly imperfect, a worrying feature given that their destruction is irreversible. Also, natural resources may have a utility as consumer goods, an argument which, perhaps, applies better to richer countries.

Third, it does not follow from the fact that certain natural resources are renewable that they should actually be preserved. The conservationist argument in favour of maintaining the stock of these resources at its present level is particularly hard to justify. It is not even certain that maintaining them at some positive stock level is optimal from the users' standpoint. There is indeed the possibility that the rate of return on maintaining the resource for indefinite use is lower than the value of the users' fixed assets in their best alternative use. And even if it is actually higher, this still does not guarantee that conservation is more profitable than drawing down the resource to a shut-down point since conservation may involve high costs while yielding benefits only in the distant future. In other words, the availability of conservation techniques or practices does not ensure that resource users will actually adopt them since it can be presumed that users are typically sensitive to whether the long-term benefits of adopting conservation practices make the cost worth bearing.

Four, the more fragile is the resource base, the more sensitive production is to resource degradation, and the less effective conservation investments are, the more likely it is that adoption of shut-down practices wild be optimal for resource users, and the lower the long-run (steady-state) stock of the resource will be even under conservation practices.

Five, in general, subsistence-constrained users have much greater incentives than more welloff users to seek to conserve their resource base, since they have limited alternative income sources. Nevertheless, if the resource base is initially degraded, they may be unable, owing to the low level of their wealth and to severe credit market imperfections, to build it up to the level where it can be optimally maintained. In such circumstances, there is good ground for state interventions that enable these poor users to overcome the initial barrier presented by conservation investments. Another, more well-known, rationale for such interventions is the presence of externalities.