Article Contentsp. 691p. 692p. 693p. 694p. 695p. 696p. 697p. 698p. 699p. 700p. 701p. 702p. 703p. 704p. 705p. 706Issue Table of ContentsQuarterly Journal of Economics, Vol. 114, No. 2 (May, 1999), pp. 337-706Front MatterContracting with Externalities [pp. 337-388]Career Concerns of Mutual Fund Managers [pp. 389-432]Consumption and Portfolio Decisions When Expected Returns Are Time Varying [pp. 433-495]Experimental Estimates of Education Production Functions [pp. 497-532]Using Maimonides' Rule to Estimate the Effect of Class Size on Scholastic Achievement [pp. 533-575]Do Better Schools Matter? Parental Valuation of Elementary Education [pp. 577-599]Psychological Factors and Stock Option Exercise [pp. 601-627]Is Bank Supervision Central to Central Banking? [pp. 629-653]State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output [pp. 655-690]Pricing the Limits to Growth from Minerals Depletion [pp. 691-706]Back Matterhttp://www.jstor.orgPricing the Limits to Growth from Minerals DepletionAuthor(s): Martin L. WeitzmanSource: The Quarterly Journal of Economics, Vol. 114, No. 2, (May, 1999), pp. 691-706Published by: The MIT PressStable URL: http://www.jstor.org/stable/2587021Accessed: 22/07/2008 18:37Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and youmay use content in the JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/action/showPublisher?publisherCode=mitpress.Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with thescholarly community to preserve their work and the materials they rely upon, and to build a common research platform thatpromotes the discovery and use of these resources. For more information about JSTOR, please contact [email protected] QUARTERLY JOURNAL OF ECONOMICS side. Rather than trying to get at the problem frontally by direct specification, suppose that we took more of an indirect approach by looking at the relevant prices. After all, we know in a general way that a lot of information is compressed into a price. To take an extreme example here, we have always sensed intuitively that if the world is going to exhaust its oil reserves within a few generations, and if, additionally, there were to be disastrous consequences for living standards of the people alive at that time, then it should show up now in a relatively "high" price of today's oil. Conversely, if today's price of oil is comparatively "low," it must mean that the limits to growth from running out of oil are not so constraining-in some sense. The question then becomes can we turn this kind of a qualitative heuristic story into a more exact quantitative method for "pricing out" the limits to growth from minerals depletion. The answer is yes, under certain circumstances, and it involves an application of the modern theory of comprehensive or "green" national income accounting. This paper has two aims. The primary aim is to provide an empirical assessment of the limits to growth from minerals exhaustion by appropriately "pricing out" depletion. A secondary aim is to introduce-by using an actual specific example-a way of reasoning, class of models, and set of issues that characterize the contemporary economic theory of "green accounting" and "sustainability." We start with the simplest possible formulation that captures the essence of the problem. Later we discuss where and how this simple model generalizes. II. THE MODEL Suppose that a stylized aggregated economy consists of three basic types of goods. Consumption C and net investment I are interchangeably manufactured, while the natural resource E is an intermediate good extracted from an exhaustible stock. Through- out the paper consumption will serve as the numeraire. Let investment also be valued at a price of one, while the comparable net price (price minus marginal extraction cost) of a unit of the exhaustible resource is P. A naive measure of net produced income might be C + I. However, this measure disregards resource depletion. Suppose that we conceptualize income more broadly as representing thePRICING THE LIMITS TO GROWTH 693 largest permanently maintainable level of consumption.2 Suppose further that we think of PE as being a form of temporary income that happens to come out of a finite stockpile under the ground, but is otherwise perfectly substitutable with C or I. Then, converting both manufactured investment and extracted income linearly into "as-if consumption," the expression, (1) C + I - PE, might be seen as representing the largest permanently maintain- able level of consumption, with the temporary income term (2) PE being a "welfare cost" of resource exhaustability, because it represents the nonpermanent part of naively measured present income C + I that cannot be counted upon for the future. The main problem with the above argument is the assump- tion of perfect substitutability between C, I, and E. While it might be all right to regard manufactured consumption and manufac- tured investment as trading off against each other linearly (indeed, interchangeability of C and I is the standard assumption in almost all aggregative growth models), it is quite another matter to pretend that E is also linearly substitutable with C or I over a nonmarginal range. Actually, the complicated nonlinear way in which the exhaust- ible resource interacts with capital when it enters the production process will largely determine economic performance over time. A lot will hinge on the degree of substitutability between K and E. Therefore, this aspect of the problem must be expressed quite generally in a paper dedicated to analyzing the limits to growth from declining E. Nevertheless, the paper shows that as long as C and I are interchangeably produced (as in the traditional formula-