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Abstract

This paper examines the differences between economists and environmentalists on issues such as resource scarcity, intergenerational equity, and the composition of social capital. While economic notions of optimal growth and the techniques of benefit-cost analysis are seen to have advantages for evaluating complex tradeoffs due to their concreteness, they have potentially serious limitations as well. The analysis identifies two sources of potential bias in the use of welfare economics for social choice: First, there is a "conservative reinforcement" implicit in benefit-cost analysis methods which will bias estimates of optimality. Second, and perhaps more importantly, the aggregation of individual willingness to pay as a measure of social welfare is shown to be invalid in the case of "positional goods," where the demand for the goods reflects the desire of individuals to raise their own relative standing. This error will cause the economic calculus to be biased against non-positional goods, including non-rival goods such as the environment. Because the dynamic consequences of even small biases in judging optimality may give rise to large social costs, the use of economic measures of welfare for social choice and environmental policy needs corrective modification. The paper concludes that such modification would likely narrow the apparent differences between economists and environmentalists.

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