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Economic Growth and the
Environment 1,2,3
R. C. D'ARGE and K. C. KOGIKU
University of California, Riverside
I
The premise that man resides within a bounded and closed natural environment, an environ-
ment with relatively fixed dimensions, has been discussed in many forms for at least three
centuries. The idea of a "spaceship earth" has recently caught the imagination and
interest of both economists and environmentalists in particular, and the public in general
[3], [5], [6] and [17]. A basic tenet of this viewpoint is that whatever has been produced,
consumed, not recycled and discarded within the sealed " spaceship earth " is still here and
will continue to be. Of course, energy dispersion may be offset by nuclear fusion or breeder
reactors so that what was previously discarded may be completely reused without seriously
impinging on the earth's natural energy reservoirs. Economically and technically-feasible
extraterrestrial transportation systems, destruction of wastes by symmetrical anti-wastes,
or increased efficiencies in solar energy conversion also may become realities. However,
such energy-augmenting technological changes, at least at this time, appear to be in the very
distant future. What is of pressing current importance, if we accept the premise of a
nearly sealed capsule earth with relatively fixed dimensions in terms of mass-energy and
waste assimilative capability, is how rapidly economic growth should proceed.
Rather than attempting to dissect the" spaceship earth" premises regarding limited
energy reserves and assimilative capability, we take these as given in this paper. We then
construct several simple paradigms of an economy confronted with a bounded, closed
natural environment and then we analyze how such an economy should optimally produce
and consume over time. The next section of the paper deals with an extremely simple
model of waste generation, based on the conservation of matter-energy principle, and with
the consumption behaviour of the economy's inhabitants assumed to be predetermined.
In subsequent sections, the model is generalized to an optimal control problem where
consumption and waste generation are allowed to be regulated, and an attempt is made to
integrate the non-mutually exclusiveprocesses of resource extraction and waste generation.
II
The materials balance view of a closed resource system indicates that tonnages of raw
materials extraction utilized by an economy are approximately equal to tonnages of waste
products generated by the economy in the long-run [3]. A basic identity derivable from
the principle of conservation of matter-energy, given the assumption of materials balance
and no recyclingis:
R ~ W f W
F= W
f
1 First version received December 1971; final version received Apri/1972 (&1s.).
2 A portion of the research reported here was financially supported by Resources for the Future,
Inc., with no responsibility for results or interpretation. A previous draft of this paper was presented at
the 1970 Econometric Society Meetings in Detroit, Michigan.
3 The authors wish to acknowledge the very helpful comments and suggestions of K. Oddson, K.
Hamada, G. Heal, and two referees.
61

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62 REVIEW OF ECONOMIC STUDIES
where R, F, and W denote material extraction, production consumed by consumers, and
total waste flows, respectively. Wi and W
J
are the amounts of waste flow originating in
the production and consumption sectors.
Given these fundamental identities and assumptions we are able to write an additional
identity provided the flow(F) of material is assumed homogeneous. Basically, we assume
that there is only one type of consumer good. Then:
F = y.N ... (2)
where y is per capita income in units of material flowper capita and N is total population.
Finally, if production and consumption are joint products of waste emissions, total waste
flows can be assumed to be proportional to final product [3], [5]:
W = gF. ...(3)
Then, by assuming that each variable previously defined refers to time (r), waste flows are
linearly related to total income measured in material units:
Wet) = g .y(t).N(t). . .. (4)
Thus, we obtain a relation between waste flows and output per capita. Actually, the
assumption of proportionality is even more restrictive than one might at first presume,
since it completely specifies an implicit technology relating output to raw materials. By
definition, Wet) = R(t), so Wet) = g .y(t) .N(t) yields yet) = ! R(t). Thus, in this most
g N(t)
simple case, production results only from the magnitude of raw materials and there is no
substitution between labour and raw materials in the production process. In terms of
crude empirical approximation the number gJ' yet) for the consumption sector i.e., Wit)/ N(t)
is estimated to be greater than one ton per capita per year for the United States at current
production levels.
Our next task is to U model" the environment in some semi-realistic and yet manage-
able way. Environmental pollution, at least in its quantitative dimensions, is usually
expressed in terms of concentrations, i.e., parts per million (ppm) of dissolved solids or
DDT, ppm (suitably indexed) of carbon monoxide or oxides of nitrogen concentrations in
the air, or tons per cubic acre of solid wastes. Thus, a natural single unit of waste concen-
tration appears to be average density. Of course, concern with densities only may be
misleading, particularly with such pollutants as carbon monoxide or methane gas generated
from solid wastes. For now, however, we will assume that density is a reasonable abstract
measure of waste concentration.
Let D(t) and v denote waste density at time t and total environmental waste holding
capacity, respectively. We, in effect, identify the closed resource system by a simple fixed
volumetric magnitude, v. Then using the definition that waste divided by volume equals
waste density and applying it to (4) yields:
D(t) = D(O) + ft y(t)N(t)dt. ...(5)
v 0
Given exogenously determined percentage rates of growth in population of lOOn and
income per capita of lOOP, waste density can be easily related to initial population levels
and material flowper capita:
(p+n)t
D(t) = D(O)+ fl_
e
- y(O)N(O). ...(6)
v f3+n
Increasing density of wastes within the closed resource systemis not necessarilybad per se.
However, if the natural environment is relatively small in comparison to current and
expected future sums of waste flows, people may suffer physiological, psychic, or other
damages. As an example, we could presume for each individual a monotonic, continuous

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D'ARGE & KOGIKU GROWTH AND THE ENVIRONMENT 63
increasing equation relating per capita damages and waste densities, where aggregate
damages are in terms of some common unit measure such as dollars or utils. Since waste
density is increasing more rapidly than either population or material flow per capita,
damage costs per capita must also be increasing. If the per capita damage function is linear
then per capita damage costs increase at the same proportionate rate as waste density.
Also, since total damage costs are a constant multiple of population and damage costs per
capita, total damage costs due to waste accumulation must be increasing at an evenfaster
rate than damage costs per capita. Thus, we obtain a spiralling rise in damage costs associ-
ated with waste accumulation, resulting from an ever increasing population, and rising
material flow per capita. Each individual's waste from production and consumption
activities affects a toll of damages on themselves and all other individuals including future
generations unless the natural environment is able to assimilate a substantial proportion
of the waste generated.
Without controls, this very simplified depiction of an extraction-consumption-waste
economy yields a Malthusian type of scenario: population and material flow per capita
increase until some threshold waste density for viable human populations is reached. At
that point, instead of subsistence level existence, either material output per capita must fall
to zero or the population is decimated.' Alternatively, we may contemplate other variants
of this scenario where population, for the most part, is decimated but a viable fewcontinue
to survive. If the natural environment is able, over long periods of time, to regenerate and
assimilate these wastes, then a cyclical pattern is obtained for the human species. The
pattern is characterized by periods of rapid growth in population and " consumption",
decimation thresholds, and then very small populations at minimum subsistence consump-
tion until environmental regeneration allows another phase of " economic development"
to proceed. Clearly, from the biologist's viewpoint, this population-material flow model
suggests the possibility of an almost continuous interspecies-disequilibrium [11], [17].
The previously developed model of the economy's interaction with the natural environ-
ment cast man in the role of a rabbit (or lemming). Growth rates of population and material
flowwere assumed to be exogenously determined, and the natural environment was viewed
as an unregenerative, non-assimilative volume. In addition, the possibilities of investment
in recycling or technical progress toward reducing waste flow per unit product, reduction
in rates of material flow through saving and increasing durability, and altering rates of
growth in material flow and population were not considered. Here we shall start by
analyzing a hypothetical economy for which all of the previous paradigm's assumptions
are retained except for exogenously determined material flows per capita. Thus, we wish
to inquire into the possibilities for and behaviour of an economy characterized as a purely
extraction-consumption-waste process.
In order to examine a time-related optimization within such an economy, in addition
to equations (1), (2), (4), and (5) a time dependent utility function, relating material flow
per capita to utility per capita, must be specified along with a disutility function for
cumulative waste flows. For expositional purposes, we shall also assume that all variables
including time are continuous, and that the optimization planning interval is finite '7:.
The following per capita utility function will be assumed.
u(y, D, r) = u(y)-u(D)+u(-r), ... (7)
which prevails for each member of society. Several conditions are presumed with regard
1 There might be other biological thresholds before catastrophic decimation is reached. For example,
increasing concentrations of waste may adversely affect reproduction rates so that population growth is
reduced as waste density builds up. Potentially, then, we may have an "iron law" of pollution: the
" natural" negative rate of growth in population is just sufficient to offset the positive rate of growth in
density of wastes necessary to support population at some minimal subsistence level. Alternatively, if the
natural environment could assimilate a certain amount of wastes, population may reach some .. steady
state " where wastes generated are exactly offset by environmental assimilation or regeneration and material
flow per capita is at some minimum subsistence level. Several simple models of a .. steady state" have
been recently described [17], [18].

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64 REVIEW OF ECONOMIC STUDIES
... (8)
to the form of the utility function in addition to separability which sidesteps the problem
of interpreting cross partial derivatives of the utility function:
uy>O UD>O uT>O
Uyy<O UDD>O UTT<O
In essence, these conditions stipulate that per capita utility of material flowis increasing at
a decreasing rate, while per capita disutility generated by increasing waste densities is
increasing at an increasing rate. As the finite planning interval r is increased, it is assumed
that per capita utility at any time t is increased, but at a decreasing rate. This is perhaps
one of our most tenuous assumptions since it implies that, regardless of how close t is to
T, individuals will be precommitted to applying a non-shifting evaluation to an increment
in r.
1
Consequently, the optimal finite planning interval is deduced with no adjustment
occurring over time to account for potential" future disobedience" in the Strotz [1] sense,
as t approaches T(l).
From equation (5), we are able to write a relation between waste flow and waste
densities:
. 1
D=-W
v
g
D = - yN.
v
... (9.1)
. .. (9.2)
Equation (9.2) is, in effect, a description of the changing state of the natural environ-
ment as a result of the amount of material consumption at time t. Equations (7) and (9.2)
yield the " pollution process " model except for specification of initial and terminal con-
ditions and inclusion of a social rate of time preference factor. The terminal time r is
conceptualized to be that period of survival which is optimum for the maximization to be
stated below. Given a presumed decimation density level (for example, 2,000..... 4,000 ppm
of carbon monoxide), D, then D(r) = D.
To complete this exposition, the initial density is specifiedas D(O) = l), and population
at t as:
N(t) = N(O)e
nt
and the utility function is discounted with a discount factor a.
2
... (10)
1 It should be noted that the assumptions of a finite planning interval coupled with a finite environmental
capacity for wastes are extremelyrigid. Of course, infinite planning intervals in conjunction with an unlimited
natural environment assimilative capacity reduces to a trivial non-existent scarcity case unless scarcity is
introduced in some other way, i.e., available technology, knowledge, or capital. Alternatively, an infinite
planning interval in conjunction with a finite environmental waste assimilative capability appears to be
philosophically inconsistent, provided population is constant or increasing through time, material flow
per capita has a positive lower bound, rates of environmental waste assimilation are very low or zero, waste
generating technology is completely static in character, and wastes at some level of concentration become
lethal to the human species. These conditions quite obviously ensure that at some moment in the finite
future, decimation will occur. The alternative case of a finite planning interval and infinite waste assimilative
capability also appears to be philosophically inconsistent. Specifying an infinite planning interval for
mankind, of course, implies the imposition of a constraint on the decision process, namely that regardless
of how degraded man's habitat becomes, he must continue to exist. A more general and encompassing
decision process would stipulate that the survival period be optimally chosen with infinity as one possible
choice. We have chosen the course of specifying a finite planning interval and making it subject to choice
by current generations. However, such a decision precludes consideration of an infinite time horizon. The
marginal utility of an additional unit of time may approach or be at infinity for those concerned only with
preservation of the human species. In such a case, the length of T would dominate all other decisions in a
trivial manner since minimal consumption at each instant of time must prevail with finite resources,
specificallywaste assimilative capability.
2 Although we shall apply a discount factor which reflects a positive or zero rate of time preference for
material-consumption flows, several potentially explosive ethical questions are brushed aside. If the human
race faces the possibilityof extinction by pollution (or other means) over a finiteinterval, are inter-generational
utility comparisons defensible? Within a different context, Dasgupta recently suggested that a "small
positive discount of the future" may be accepted as "ethical" [12]. However, if we assume that each

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D'ARGE & KOGIKU GROWTH AND THE ENVIRONMENT 65
... (11.1)
Given the above definitions, an optimal control problem can be formulated as follows;
maximize
f
t fT{ d 1_e-
at
}
J = [u(y)-u(D) +u(T)]e-atdt = [u(y)-u(D)]e-
at+
- --u(t) dt
o 0 dt a
where y is the control variable and D is a state variable, whose equation of motion is
iJ = fl yN = bye" (b == gN(O)jv).
v
...(11.2)
The problem is to select the admissable control y so that a maximum integral of discounted
individual utility is achieved over the interval 0 t T where T is free to vary.
The Hamiltonian function for the problem can be written:
d 1_e-
at
H = [u(y)-u(D)]e-
at+
- --u(t)+ pbenty
dt a
d 1-e-
at
= [u(y)-u(D) +pbye(n+a)t]e-
at
+ - --u(t)
dt a
... (12)
where p is the costate variable corresponding to D.
According to the theory of optimal control, optimality calls for the following con-
ditions! :
iJ = bye" DCO) =!2 D(T) = 15
. aH (D) -at
p = - - = UD e
aD
y* maximizes u(y)+ pbye(n+a)t
[u(y)-u(D)+ pbye'?"n)']e-
at
= f {a[u(y(s-u(D(s]
d 1_e-
at
- npbye(n+a)S}e-asds - - --- u(t)j
dt a t
d 1-e-
at
[u(Y(T-u(D(T + pbye(n+a)T]e-
aT
+ - --u(t)/t = O.
dt a
If we define a new variable
z = - bpe(n+a)t
... (13.1)
... (13.2)
... (13.3)
... (13.4)
. .. (13.5)
generation can be exactly separated from others, then current generations with higher rates of time preference
may actually eliminate the existence of some distant future generation. The faster we consume in a closed
resource system, the more rapidly extinction occurs. While the utility of distant generations may seem
valueless now, if we were that distant generation, we may very well value our continued existence at or
approaching infinity. Even very high rates of time preference over a finite interval would not make it
worthwhile to consume currently above some basic subsistence level, provided the last future generation's
utilities were considered. In any case, we shall assume that such inter-generational utility comparisons can
be contrived so that each generation would be equitably considered, including potential but excluded future
generations, and in the remainder of the discussion emphasize the results where all generations are treated as
equals, i.e., a = O.
1 See, e.g., Michael Athans and Peter L. Falb, Optimal Control, New York, N.Y.: McGraw-Hill,
1966, Theorem 5-7, p. 293.
E---40/1

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66 REVIEW OF ECONOMIC STUDIES
... (12')
... (13.1')
... (13.2')
...(13.3')
then (12) and (13.1)-(13.5) become
d l-e-
at
H = [u(y)-u(D)-zy]e-
at+
- --u(t)
dt a
dD/dt = benty D(O) = f} D(-r:) = i5
dzldt = (n+a)z-bentuD
u(y)-zy u(w)-zw for all w such that 0 Vo w VI < 00
where V
o
is a lower bound and VI an upper bound for consumption;
u,-z 0
[u(y(t)- u(D(t - z(t)y(t)]e-" = fe-"{a[u(y(s-u(D(s] +nz(s)y(s)}ds
d 1_e-
at
- - u(t) It ...(13.4')
dt a
. .. (13.5')
d l-e-
at
[u(y(r-u(D(r)-z(t')y(r)]e-
at+
- u(t)lt =O.
dt a
For (13.3') the control should be:
y = Vo if z u,(vo)
= [Uy]-I(Z) ifu,(vt) z u,(vo) ... (13.6)
=Vt if z u'(Vt).
That is, Y = F(z), which is Lipschitz continuous for all z and non-increasing, should have
the graph shown in Figure 1. Using F(z) the system (13.1')-(13.2') can be replaced with
dD/dt = bentp(z) D(O) = f} .. (13.1")
dzldt = (n+a)z-bentuD z(O) =Zo (13.2")
where Zo is free. A solution exists and is unique for all zoo Several possible timepaths are
shown in Figure 2.
From the preceding two equations:
= 0 ... (14.1)
depending on
y =F(z)

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D'ARGE & KOGIKU GROWTH AND THE ENVIRONMENT 67
z z
b
--u ---
n+a D
1I/Vo) --- ---------
1I/Vo) --- --------
b
n+a " ---
... (14.2)
U/V
1)
--- --------
b
n+a
UD
D
0
D
0
FIG. 2
dz 0
dD <:
G:: bUD
z---
<:
n+a
depending on
At t = 0
Whether z will start out increasing or decreasing can be determined by (14.2). As t and D
increase, z will increase (remain constant, or decrease) depending on whether z is greater
than (equal to, or less than) bentuD/(n+a). The control will shift according to (13.6).
Since we assumed that "C satisfying (13.5') is positive and finite, the interpretation of the
above conditions are as follows. Equation (13.3') indicates that the variable z is positive
(and the costate variable p is negative). Equations (13.6) indicate that optimal consumption
y is a non-increasing function of z; that consumption should be kept at the minimum
consumption level Vo if the variable z (a " cost" of utilizing an increment of waste density
resulting from consumption where the cost implicitly reflects a negative value of p associated
with waste density) exceeds the per capita marginal utility of subsistence consumption
uivo); that consumption should be kept at the maximum level Vi if z falls short of the
marginal utility of the maximum consumption UiVl); and that consumption should be
sufficient to equate the marginal utility of consumption to z when z is between uy(vo) and
UiVl)' Equation (13.2") indicates that the shadow price, z, of waste density is changing in
response to the marginal disutility of the individual due to the increment in waste density,
and that the shadow price z should fall when t and D are large enough because D increases
by (13.1) and U
D
increases by (8).
At first glance this result may appear incorrect since, with increasing total waste flows
over time, a greater degree of" control" (compared with no regulation) on pollution loads
would seem imperative. Note, however, that condition (13.2") refers to optimal utilization
of waste storage through time and not to unregulated utilization patterns. Accordingly,
optimal utilization commencing from an unregulated state requires that in the initial period

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68 REVIEW OF ECONOMIC STUDIES
a substantial undiscounted shadow price should be applied to waste density. Following
the initial large-scale shift the shadow price decreases over time.
Re-writing (13.3') for an interior solution
Hence in this case
u,(y) = z.
... (15)
... (17)
Y= Zfuyiy) ... (16)
and y is increasing when z is decreasing. Equation (13.2") shows that z will be falling
when
(n +a)z < bentuD
that is,
bent
z = uiY) < --u
D

n+a
Therefore, y will be increasing when the marginal utility of consumption is small relative
to the marginal disutility associated with rising waste density. Combining (16) and (13.2")
when t is sufficiently large,
. (n +a)z - bentu
D
y = ---'-------=-
uyiy)
... (18)
... (19)
If the discount factor a is zero, implying equal valuation of all future generations that do
exist, and the population growth rate n is also zero, then (13.2") implies that z falls from the
beginning and by (13.6), consumption, if not at the maximum level initially, will eventually
begin to increase. Thus, if these sufficient but not necessary conditions (see Figure 2) are
fulfilled, such an economy will increase consumption over time to compensate for the
disutility associated with rising waste concentrations.
However, this model is much too simple in terms of at least two groupings of character-
istics. First, extractive and renewable resources are assumed to be quite literally free.
Second, a non-progressive economy facing an inert natural environment is assumed,
where waste recycling, reduction in obsolescence rates, technological change, savings rates,
the environment's assimilative capacity and other factors are not allowed to continuously
alter over time the magnitudes and thereby disutilities of waste flows. In what follows,
we will attempt to remove some of these limitations. But before proceeding, one important
tentative conclusion can be inferred: if our assumptions are not without some element of
validity, waste generating processes in both production and consumption sectors need to
be taxed at relatively high rates in the near future, particularly if social rates of time prefer-
ence are close to or are, by design, constrained to be zero.
Issues emerging from environmental management arise not only from the optimal
rate of waste generation in a closed medium but also with regard to the rate of extractive
(or renewable) resource exploitation. If extractive resources are finite in magnitude and
can for all practical purposes be exhausted, then optimal environmental management
involves a " conjunctive use" type of allocation problem where one must consider rates of
extraction and rates of waste generation. Thus, the" pure" mining problem must be
coupled with the " pure" pollution problem and questions like these become relevant:
which should we run out of first, air to breathe or fossil fuels to pollute the air we breathe?
For expositional purposes, we shall assume an initial finite stock of extractive and
non-renewable resources such that:
Q=-R. . .. (20.1)

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D'ARGE & KOGIKU GROWTH AND THE ENVIRONMENT 69
where R denotes, as previously, the amount of resources extracted. Also boundary con-
ditions will be stipulated for Q:
Q(r) = Q
Q(O) = Q
... (20.2)
... (20.3)
with Qand Q constants equal to the terminal and initial stock of extractive resource.
1
in order to consider the possibilities of exhausting extractive resources and substitution
between labour and resources in producing consumable goods, excluding services, we will
introduce several changes into the model given earlier. Thus:
R(t) = W(t) +residual determined by (20.5) (21.1) (22.1) ... (2004)
defines the materials balance relationship at any instant of time." Also, we shall assume
that total population is employed in each period, and that population equals the labour
force. A homogeneous production function of degree one is assumed in which substitution
exists between raw materials and labour:
F = F(R, N) = f(r)N ... (20.5)
with r denoting extractive resources per capita. It is also assumed that this technological
relationship fulfils the usual first and second order diminishing marginal factor productivity
conditions, namely f,.>0, f,.r <O. It is assumed that waste flows resulting from the produc-
tion process are directly related to the quantity of extractive resources:
or
Wi = H(R) ... (21.1)
Wi = h(r)N hr>O hrr>O. . ..(21.2)
Finally, waste flows originating in the consumption sector are presumed to be related
to the amount of goods produced and consumed
3
:
or
W
f
= G(F) ... (22.1)
... (22.2)
1 The case depicted here is one where the change in stock of resources equals flow: a purely extractive
process. Alternatively, if the resource is renewable, i.e., animal or plant populations (20.1) would need to
include a relationship for biological growth. It has become common practice to relate fish population
growth rates to the initial mass of fish [11], [12], [15] and [16]. In terms of our notation and variables,
and provided E(Q) denotes the growth-bio-mass relationship, (20.1) would then be altered to:
Q = E(Q)-R
For simplicity(20.1) will be applied, though it is to be noted that the model, with some changes in conclusions
and inclusion of the possibility that 7" = CX) or a terminal value of E(Q), will also accommodate biological
growth relationships, of the above type.
2 As long as there is a " mass balance" in that raw materials extraction equals waste flows in each
instant of time or even over short gestation-production lags, saving, recycling, or other long term activities
which markedly reduce current waste flows per unit of production, must by definition be zero. Thus, in
order to accommodate such waste reducing possibilities it is necessary to adjust the mass balance relationship
[5]. However. the theoretical possibility of continuous recycling within a production cycle does exist,
though we shall not treat this case except via a constraint on recycling in a variant of the model which is
developed later.
3 Savings hypotheses in most neoclassical models of growth indicate that a certain proportion of
production is not consumed currently, and thus in our terminology does not contribute to current waste
flow. However, obsolescence or decay rates in these same models indicate the proportions of accumulated
saving-investment which do enter as waste currently. Thus, the relationship g(y) (relating waste flow from
the consumption sector to the amount of goods produced) can be thought of as embodying both accumula-
tion rates and depreciation rates for durable goods within the consumption sector. Additionally, in the
simplified model the g(y) relationship implicitly contains recycling rates from the consumption sector back
into the consumption sector. The processes of depreciation, consumption-saving, and recycling (within the
consumption sector) are therefore all submerged in g(y), and certainly some of the most important policy
questions on environmental pollution require that these processes be carefully separated.
The her) function links rates of raw materials extraction directly to the magnitude of waste flow from
the production sector. Thus, this relationship embodies such important determinants of pollutant loads as
rates of obsolescence and decay of machinery and equipment, and efficiency of raw materials conversion.

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70 REVIEW OF ECONOMIC STUDIES
Relation (22.1) yields a one to one correspondence between waste flows and final
goods produced if no saving or recycling occurs, and Wi = O. However, in what follows,
such an equality will not be assumed. Given (21.2) and (22.2), total waste flows can be
defined in terms of rand y:
and thus from (9.1):
W = [h(r)+g(y)]N
1
IJ =- [h(r)+g(y)]N.
v
... (23)
. .. (24)
Extracting resources such as harvesting forests, oil spills from off-shore oil derricks,
strip mining, reductions in river flow, and soil erosion resulting from removal of natural
vegetative cover for crop production may impose social costs (or disutilities) emanating
from psychic and aesthetic values associated with undisturbed environments. It therefore
seems appropriate, within the context of the model studied, to include a per capita loss
function which reflects disturbance of the natural environment through extraction (or
distortions in interspecies equilibrium). Let us incorporate such a per capitaloss function
of the following form:
u(Q) ...(25)
with uQ >0, uQQ<O. These conditions imply the stock of natural resources offers some
pristine enjoyment such that a reduction in their availability (or their disturbance) causes
increasing per capita marginal disutility, The per capita utility function that emerges is:
u(y, D, Q, r) = u(y)-u(D)+u(Q)+u('t").
Then the new control problem is to maximize
J
f Jf{ d l_e-
at
}
J = u(y, D, Q, 't")e-atdt = [u(y)-u(D)+u(Q)]e-
at+
- --u(t) dt
o 0 dt a
where
y = fer).
The control variable is r, and the state variables are D and Q, with
. 1 ]
D = - [h(r)+g(y) N
v
...(26)
... (27)
... (28)
... (29)
... (30)
...(31)
Q= -R= -rN
D(O) =!l D('r:) = ]j
Q(O) = Q Q(r) = Q.
The Hamiltonian function for this problem is
d 1-e-
at
N(O)
H = [u(f(r-u(D)+u(Q)]e-
at+
- --u(t) + -
dt a v
d l-e-
at
={u(f(r-u(D)+u(Q)-zl[h(r)+g(f(r]-z2r}e-at +- u(t) ... (32)
dt a
where p and q are the costate variables for D and Q, respectively, and Zl and Z2 are their
transformations:
Zl = - N(O) e(lI+a)t
p
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D'ARGE & KOGIKU GROWTH AND THE ENVIRONMENT 71
The rest of the analysis is analogous to the case analyzed earlier without a constraint on
extractable resources, Q. The condition corresponding to (13.3') is
r* maximizes u(f(r)) - z1[h(r) +g(f(r))] - Z2r ... (33.1)
... (33.2)
uyf,.-zl(hr+gyf,.)-Z2 ~ 0
The control corresponding to (13.6) is:
r = r
o
if zl(h
r+gyf,.)+Z2 ~ uyf,.\ ro'
= [uyf,.]-l(Zl h
r+
gyf,.)+Z2)
if uyf,.1 r1 ~ zl(h
r+gyf,.)+Z2 ~ uyf,.1 ro'
= rh if zl(h
r+gy.(,.)+Z2 ~ uyf,.1 r1
where ro and r
1
correspond to Vo and VI for the case without Q, in defining the relationship
between resource extraction and production.
Define:
and
G(r) = her) +g(i(r)) then G
r
= h
r+
gy/,. ... (33.3)
Z == zl(h
r+
gyf,.)+Z2 = ZIGr+Z2 ... (33.4)
then (33.2) defines r = F(z), which should have a graph as shown in Figure 3. Using
F(z), equations (28) and (29) can be rewritten as:
dD = QN(O)ent = N(O) entG(r) D(O) = !2
dt v v
dQ = _N(O)entp(z) Q(O) =Q.
dt
r = F(z)
'1 ....----------
'0
_+.-- ....!...- -.L.. Z
FIG. 3
The canonical equations for the costate variables are:
dp _ aR _ (D) -at
- - - - -UD e
dt aD
dq = _ ~ = -uQ(Q)e-at.
dt aQ
... (33.5)
...(33.6)
... (33.7)
...(33.8)

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72 REVIEW OF ECONOMIC STUDIES
Hence
dZ1 ( ) N(O) lit
... (33.9) - = n+a Z1 - -- uDe
dt v
dz
z
... (33.10) - = (n+a)zz-N(O)uQe"
t
dt
dz dZ1 dZ2 [G ]
... (33.11) - = G
r
- + - = (n+a)z- --.!UD+U
Q
N(O)e"
t

dt dt dt v
Hence:
dz
(n+a)z- [ ~ uD+uQJ N(O)e'"
... (33.12) -
dD
N(O) e"tG(r)
v
and
dz
(n+a)z- [ ~ UD+UQJ N(O)e'"
... (33.13)
dQ -N(O)e"tF(z)
It is obvious from (33.12) and (33.13) that as t and D increase and Q decreases, z will
increase (remain constant, or decrease) depending on whether z is greater than (equal to,
or less than) :
[ ~ U D U Q ] N(O)e'"
n+a
... {33.14)
The transformed variable z will start out increasing provided (33.14) is less than z when
evaluated at t = O.
Given the assumption that T is positive and finite, the interpretation of the above
conditions is as follows: (33.1) indicates that the transformed variable z is positive. Equa-
tions (33.2) indicate that the optimal resource extraction rate r is a non-increasing function
of z; that r should be kept at the minimum level ro if the variable z exceeds the per capita
marginal utility product of subsistence resource extraction uy(vo)/,(ro); that r should be
kept at the maximum level r1 if z falls short of the per capita marginal utility product at the
maximum rate of resource extraction Uy(vl)/,(r1); and that r should be selected to equate
the marginal utility product of resource extraction to z when z is between uy(vo)/,(ro) and
U/vl)/,(r
1
) .
Equations (33.9)-(33.11) show that the transformed shadow price z is changing in
response to the marginal disutilities of the population associated with the increment in
waste density and decrement in extractable resources and that the shadow price z should
fall when t and D are sufficiently large and Q is sufficiently small. Hence, r and therefore
consumptionper capita(y) will eventually begin to rise if both are not already at a maximum.
If the discount factor a is zero and population growth is zero, (33.11) implies that z
falls from the beginning and by (33.2), resource extraction, ifnot at a maximum or minimum
level initially, will immediately begin to rise. The reason for this result is obvious upon
reflection. Extracting resources and rising waste densities are both associated with loss
in utility so it is optimal to postpone high consumption rates until they are needed to com-
pensate for the increasing disutility associated with rising waste density and depletion of
the environment.

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D'ARGE & KOGIKU GROWTH AND THE ENVIRONMENT 73
In the simplified paradigms examined thus far, the possibility of recycling from the
consumption sector back into the production sector has not been examined. One possibility
of including such inter-sector recycling in our last model would be by defining a new
decision variable as representing the amount of recycled materials from consumption to
production sectors. Hypothetically, we should also include it as a separate argument of the
production function (20.5) since it might be expected a priori that recycled material would
be less productive than" original" raw materials and contribute differently to total waste
flows. Also, there must be some upper limit established on the magnitude of recycling in
each instant of time, or there is no " scarcity" of new and recycled extractive resources.
Coupling these modifications for recycling between production and consumption
sectors to the earlier model given by (26) through (31) a new set of first order conditions
are derivable. These conditions indicate that recycling between production and consump-
tion should be enough so that the marginal utility product of recycledmaterial is equal to (the
case of an interior maximum) or does not exceed (the case of a boundary maximum) the
marginal disutility associated with waste density which is not increased as a result of re-
cycling, plus the shadow price of the upper-limit constraint on number of recycles per
instant of time.
1
Conditions for rising per capita consumption can be derived as in the
preceding control problem. The only difference is that, with recycling, two controls need
to be selected rather than one.
V
... (34.1) maximize
In order to briefly explore several facets of investment in recycling machinery and equip-
ment, we shall propose a simple investment model where, for convenience, waste flows
from the production sector are assumed to be channelled through the consumption sector,
i.e., Wi = 0 and W = Wf' Also, to reduce complications, we will also assume extractable
resources are not scarce. Then let k denote the per capita amount of capital committed to
recycling, s the per capita amount of recycled material, c per capita consumption, 0 an
instantaneous decay rate of recycling capital, and rl the ratio of recycled material to recycling
capital. Then, the problem becomes:
J = tu(c, D, T)e-a<dt
subject to
o= g ~ s) HkJ N
k = y-6k-c
y = fer, s)
s = ak:
w = WIN = g(r, so, gr>O,
grr<O, gs<O, gss>O
... (34.2)
... (34.3)
... (34.4)
... (34.5)
where the rate of resource extraction r and consumption c are the control variables. In the
utility function in (34.1), per capita consumption c appears rather than per capita output y.
In (34.2), the rate of change of waste density is affected not only by the rate of production
and recycling, but also by the depreciation of the recycling capital stock whose life is 1/0.
Equation (34.3) postulates that the rate of accumulation of recycling capital stock is net
output minus consumption. Equation (34.4) is the production function for output, while
equation (34.5) is the assumed constant ratio between recycled material and capital stock.
1 A more complete description of recycling results are contained in: R. C. d'Arge and K. C. Kogiku,
"Economic Growth and the Natural Environment," Program in Environmental Economics, University of
California, Riverside, Working Paper Series, #1, (April 1971).

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74 REVIEW OF ECONOMIC STUDIES
... (34.9)
".(34.7)
... (34.8)
... (34.6)
Z2 = eatq
the Hamiltonian function becomes
H = {U(C)-U(D)-Z. [g(r IXk) HkJ +z,[f(r, IXk)
}
-at d l_e-
at
-bk-c] e + - --u(t)
dt a
If p is the costate variable for D as before, and q is now the costate variable for k,
then the Hamiltonian function for this problem is
H = IXk) HkJ
d 1-e-
at
+q[f(r, etk)-bk-c] + - --u(t) .
dt a
Introducing the transformed costate variables
Zl = _N(o)e<n+a)t
p
and
.,,(35.1)
... (35.2)
Hence for a maximum of the Hamiltonian function r = '0 and c = Co, Le., r and c are at
minimum levels, if
... (35.3)
".(35.4)
when
and
... (35.5)
... (35.6)
and r = r l' and c = c1 (r and c take on maximum levels) when
Z2 grl I
v- > - Z2<U
c
C1'
Zl f, r1
In the case of an interior maximum
.,,(35.7)
gr f,
Zl - = U
c
r-
V
... (35.8)
The relationship between controls and costate variables are depicted in Figures 4 and 5.
The canonical equations are (34.2)-(34.3), and
.i
l
= (n+a)zl -une-atN(O) .,,(36.1)
2, = az,+z. (g;1X +8) -z2(f,IX-8). ...(36.2)

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D'ARGE & KOGIKU GROWTH AND THE ENVIRONMENT 75
Uri
lr TO
~ ----------------------
'0 1----------1'
-------...:.-------:.------------ v ~
Zt
FIG. 4
Cl t--------_
I
I
I
I
I
I
I
I
Co ~ ~
: ~ Zz
Ie Ieo
FIG. 5
That is, the shadow price of waste density changes according to the marginal disutility of
waste density, while the shadow price of investment (which equals or does not exceed the
marginal utility of consumption) changes according to the difference between the marginal
valuation of output due to an additional unit of capital stock and the marginal valuation
of waste density due to an additional unit of capital stock.
If a = n = 0, Z 1 will fall. z2 will falI and therefore consumption per capita will rise
through time if:
Zl (9: +0) <Z2(f,rx-J). . .. (37)
The left-hand side can be interpreted as the shadow price of net waste reduction due
to an additional unit of recycling investment while the right-hand side is a shadow price
of net output resulting from an additional unit of recycling investment. By algebraic
manipulation of (37), (35.2), and (35.8), assuming an interior solution and to:><5, one can
deduce that the inequality (37) is more likely the smaller the rate of depreciation on recycling
investment <5, and the smaller the magnitude of v, total waste holding capacity.
If 22 falls faster than 21' v 22 falls with the final result that consumption per capita, c,
2
1
increases while resource extraction per capita, r, decreases over time. This can be verified
by a quick glance at Figures 4 and 5. Also, if Z2 falls more slowly than Zl' v Z2 rises such
2
1

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76 REVIEW OF ECONOMIC STUDIES
that both c and r increase over time. Finally, if Z2 rises, i.e., the inequality in (37) is
reversed, then r rises and c falls. Which case is the more likely? We have already seen
that the smaller v and b, the more likely it is that Z2 will decrease over time. We can also
assert that in the case of an interior optimum, the greater the per capita marginal disutility
of rising waste density, the more rapidly z1 will fall and the greater the marginal utility of
consumption per capita, the faster Z2 will fall if the inequality (37) holds. Therefore, the
more distasteful a degraded environment is compared with higher current consumption,
and the smaller the natural environment the more likely that Zl will fall faster than Z2,
and both consumption per capita and resource extraction per capita will rise through
time.
Throughout the brief discussion of consumption behaviour defining the optimum in
a closed resource system, we have omitted comparisons with what might result in a non-
regulated economy. Yet it is obvious that if the closed medium analogy contains some
degree of validity, and there are disutilities associated with increasing waste densities and
disturbance of the natural environment, a hypothetical economy characterized by individual,
unconstrained decisions will be inefficient in its utilization of the environment. Not only
will the closed medium tend to be used up too rapidly, but the economy's uncoordinated
choices or piece-meal planning with regard to both resource extraction and pollution rates
will generally result in an inefficient consumption path toward decimation, or the " anti-
bliss " point.
To end on a rather facetious remark, it is interesting to contemplate whether the global
economy is, in fact, near the optimal consumption path given the increasingly degraded
environment, rapid exploitation of energy reserves, and long-run rising per capita con-
sumption level.
REFERENCES
[1] Strotz, R. H. "Myopia and Inconsistency in Dynamic Utility Maximization ",
Review of Economic Studies, 23 (1957), 165-180.
[2] Scitovsky, T. "External Diseconomies in the Modern Economy", Western Economic
Journal, 4, No.3 (Summer 1966).
[3] Ayres, R. U. and Kneese, A. V. "Production, Consumption and Externalities ",
American Economic Review, 19 (June 1969).
[4] Barnett, H. J. and Morse, C. Scarcity and Growth . . ., Resources for the Future,
Inc. (Baltimore: Johns Hopkins Press, 1963), 10.
[5] Kneese, A. V., Ayres, R. U. and d'Arge, R. C. Economics and the Environment:
A Materials Balance Approach, Resources for the Future, Inc., (Baltimore: Johns
Hopkins Press, 1970), Ch. III.
[6] Boulding, K. "The Economics of the Coming Spaceship Earth", in H. Jarrett,
Environmental Quality in a Growing Economy, Resources for the Future, Inc.,
(Baltimore: Johns Hopkins Press, 1966).
[7] Cummings, R. G. and Burt, O. R. "The Economics of Production from Natural
Resources: Note ", American Economic Review, 59 (December 1969).
[8] Dorfman, R. "An Economic Interpretation of Optimal Control Theory", American
Economic Review, 59 (December 1969).
[9] Brown, G. "An Optimal Program for Managing Common Property Resources
with Congestion Externalities ", unpublished manuscript (1969).

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