complex systems and valuation abstract ecological and economic systems are undeniably complex whereas a goal of delineating ecosystem services is to make readily apparent some of the important ways in which ecosystems underpin human welfare insights are also gained by appreciating the nonlinear dynamic properties of ecosystems in this paper we review some of the relevant characteristics of complex systems ecosystems and economic systems share many properties but valuation has typically been driven by short term human preferences here we argue that as the force of humanity increases on the planet ecosystem service valuation will need to switch from choosing among resources to valuing the avoidance of catastrophic ecosystem change

the financial effects of fuel adjustment clauses on electric utilities during the 1970s fuel adjustment clauses facs were adopted by many electric utilities as a means of adjusting electricity prices when per unit fuel costs changed recently many state regulators have questioned the need for facs since fuel costs have become more stable some have been reluctant to abolish facs because of fear that an electric utility s financial risk will increase and with it the cost of capital for the utility this article shows empirically that the risk effects of facs may be quite small and that risk could actually decline if an fac is removed however a wealth effect may exist that should be considered before an fac is abolished copyright 1990 by the university of chicago

monopoly pricing of capacity usage under asymmetric information the design of monopoly pricing strategies is examined in a general framework with an unknown population distribution of consumer characteristics and downward sloping multi unit consumer demand in addition the monopolist has increasing marginal cost three pricing strategies are shown to implement the profit maximizing allocation reference point pricing multi unit competitive bidding with variable outputs and generalized priority service the analysis of pricing also is extended to include random capacity copyright 1993 by blackwell publishing ltd

the neoclassical trojan horse of steady state economics the vision of a steady state economy elaborated by herman daly describes an economy that uses materials and energy within the regenerative and assimilative limits of the planet s ecosystems sustainable scale just distribution and efficient allocation are its constitutive theoretical goals this paper is a critique of the theoretical foundations of steady state economics it argues that steady state economics consists in an attempt to squeeze neoclassical economics into a biophysical and ethical corset as a result many fundamental flaws and criticisms of neoclassical economics remain as a consequence steady state economics does not lead to a radical departure from or improvement upon neoclassical theory but rather to fundamental internal inconsistencies between the old economics paradigm and new progressive ecological economic thinking contradictions appear at various levels ranging from ontology and methodology to theory and values as daly has pioneered the foundations of ecological economics with his thinking these ambiguities are not only problematic for steady state economics but ecological economics as a field more generally the paper concludes that ecological economics has to let go of neoclassical foundations as they contradict its core values and ambitions a new and consistent theory of political economy of the environment along heterodox lines is needed

100 percent reserve banking a critical review of green perspectives abstract 100 percent reserve banking c perb is an enduring proposal for monetary reform that has been taken up by some ecological economists this paper identifies three groups of green arguments in favor of c perb and offers some criticism first the proposal could serve to constrain new investments by the availability of savings thereby checking economic growth however this would strongly increase interest rate volatility second it could potentially elevate environmental considerations in decisions about resource allocation by increasing the role of the democratic state as an economic actor this line of argument faces problems that require further detailed exploration and historical perspective third a transition to c perb would allow debt levels to be drastically cut this is technically possible but politically a tall order whether the existing system of debt based bank money generates a significant growth imperative is unclear and the importance of other driving forces behind perennial economic growth in modern societies which c perb does not address remains an issue of contention in general the adoption of c perb presupposes a tremendous reconfiguration of power relations between states and finance capital

us demilitarization and global warming an empirical investigation of the environmental peace dividend abstract in the paper input output methods are used to generate ballpark empirical estimates of the implications for global warming of the projected demilitarization of the us federal budget the impact is found to be qualitatively ambiguous and highly sensitive to the manner in which the funds saved are distributed the effect is adverse where the budgetary savings are used to fund economy wide cuts in personal taxation and or deficit reduction in other cases the effect may be neutral or beneficial

ecological macroeconomic models assessing current developments our society faces a dilemma while continued economic growth is ecologically unsustainable low or negative rates of economic growth are accompanied by adverse social impacts hence there is a need for macroeconomic tools that can help identify socially sustainable post growth pathways the emerging field of ecological macroeconomics aims to address this need and features a number of new macroeconomic modelling approaches this article provides 1 a review of modelling developments in ecological macroeconomics based on the literature and interviews with researchers and 2 an analysis of how the different models incorporate policy themes from the post growth literature twenty two ecological macroeconomic models were analysed and compared to eight policy themes it was found that environmental interactions and the monetary system were treated most comprehensively themes of income inequality work patterns indicators of well being and disaggregated production were addressed with less detail while alternative business models and cross scale interactions were hardly addressed overall the combination of input output analysis with stock flow consistent modelling was identified as a promising avenue for developing macroeconomic models for a post growth economy however due to the wide interpretation of what the economy entails future research will benefit from employing a range of approaches

imperfect price discrimination and welfare we develop a model in which a monopolist uses differences across consumers in their valuation of time to imperfectly price discriminate though it is customary to analyse price discrimination problems by the calculus of variations after postulating a continuum of types we assume a finite number of types and exploit the geometry and duality of the contract set and the structure of the programming specification we analyse in detail the qualitative properties of the model s solution and show by construction that our results exhaust the implications of the model for equilibrium contract pairs we show that imperfect discrimination is not bounded in welfare terms between perfect discrimination and single price monopoly and that the deadweight loss consumer surplus and output comparisons between single price monopoly and imperfect discrimination are ambiguous

risk price regulation and irreversible investment abstract we show that regulators price setting rate base and allowed rate of return decisions are inextricably linked if prices are set so that regulated firms just break even whenever they are forced to invest breaking even ex ante is a necessary condition for ramsey pricing to be sustainable over time unless regulators adopt traditional rate of return regulation the irreversibility of much infrastructure investment significantly alters the results of the approach to price setting described by marshall et al 1981 marshall william j yawitz jess b greenberg edward 1981 optimal regulation under uncertainty journal of finance 36 4 909 921 in particular the practice of optimizing inefficient assets out of the regulated firm s rate base as occurs in total element long run incremental cost calculations in telecommunications exposes the firm to demand risk the firm requires an economically significant premium for bearing this risk and this premium is a function of both the systematic and unsystematic risk of demand shocks in addition we argue that if the firm is to break even under incentive regulation then the level of the rate base will exceed the optimized replacement cost by an amount which we interpret as the value of the excess capacity of the firm s assets if this component is excluded from the rate base incentive regulation will not be sustainable

the vanishing liquidity effect of money on interest analysis and implications for policy this paper seeks to re examine the effects of money on interest rates the earlier literature on this topic determined fairly well the pattern of response of interest rates to changes in money growth the notable studies of cagan 1972 cagan and gandolfi 1969 and gibson 1970 served to establish the professions stylized pattern as presented in section i section ii presents new evidence on the subject and finds that the old empirical generalizations no longer hold specifically the results suggest that the initial liquidity effect of faster money growth is likely to be offset within the month following the monetary policy change sections iii and iv investigate the reasons for the changing pattern of monetary effects on interest rates and discuss the policy implications of the new pattern

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

optimal nonlinear pricing and contingent contracts rationing of output may be required to allocate resources when it is costly to operate a system of spot markets in electric power markets for example interruptible service is the most frequently used form of capacity sensitive allocation after time of use pricing this paper examines the welfare properties and ease of implementation of alternative rationing rules and the pricing of contracts based on rationing rules the model allows for both demand and supply shocks the theoretical analysis is illustrated by application to curtailment rules and pricing in electric power markets rationing rules are a means of sharing risk and joint costs insurance provides a means of sharing the financial costs of random events however there are additional welfare gains to be obtained from pooling physical quantities of goods in the presence of random demand and supply see spulber 1985 by rationing goods the common costs of production or productive capacity can be reduced while also reducing individual risk this explains in part the extensive attention devoted to rationing of electric power electric power is subject to significant randomness in both supply and demand allocation mechanisms based on prices that adjust in real time on complete contingent contracts or on renegotiation of contracts in response to new information can involve prohibitive transaction costs avoidance of the need to ration would require inefficiently high capacity investment electric utilities must therefore employ rationing rules these rules must be

regulation the opec oil supply shock and wealth effects for electric utilities a popular view among specialists in electric utility economics is that the regulatory process exacerbated the negative effects of the opec s oil price increases during the 1970s in contrast peltzman s theory of regulation suggests that regulators should buffer a firm from cost increases this paper examines these contending propositions by examining the stock returns for a sample of electric utilities during the opec oil shock of october 1973 the data are more consistent with a buffering effect than a regulatory lag

on the life cycle metaphor where ecology and economics diverge abstract there is an attractive analogy between nature and industry based on the similarity of natural functions and certain industrial activities for instance animals ingest eat and digest food finally there are metabolic wastes firms are analogous to organisms in several respects insofar as they consume material resources process digest them and produce output products and excrete wastes firms like organisms also compete with each other for resources curiously enough one of the apparent differences between natural and man made systems is actually not one like the industrial system the natural system does not recycle everything however there are at least four real and important differences between the biosphere ecology and the technosphere economy first there is no primary producer in the economic system analogous to what photosynthesizers play in the biosphere inputs to the economy are mostly natural resources capital services and labor second in the economic system output is a heterogeneous mix of manufactured products and services labor in economics is an input but not an output the economic system recycles much less than the ecological system but utilizes a far greater suite of elements in the biosphere there are no products as such growth is tantamount to accumulation of embodied solar exergy in the form of cellulose sugars lipids and proteins the biosphere produces only wastes and more of itself plus dead matter third in the biosphere there are no markets there is no medium of exchange like money and there is nothing analogous to paid labor exchanges are involuntary i e by predation parasitism or theft fourth evolution in nature is driven by differentiation by random mutations of the genome and darwinian selection based on reproductive success in economics differentiation is based on discovery invention and innovation by intelligent economic agents and selection is based on competition at the individual or firm level either way the economic system is not closely analogous to an ecosystem attempts to use ecological concepts in an economic context are often misleading and unjustified the paper discusses the implications of the eco eco mismatch for resource accounting and life cycle analysis

monopolistic provision of congested service with incentive based allocation of priorities because of the uncertainty associated with capacity availability as well as demand all consumers in a public utility face a chance of not getting the service however small that chance may be in electric utilities for example the reserve margin the percent excess capacity over the peak demand determines the reliability of service to the consumer we will show in this paper that utilities can employ a priority service scheme i e offer a menu of prices and priorities that can work to the advantage of consumers as well as the utility unreliability in service obviously results in shortage costs to consumers and these shortage costs can vary a lot among consumers depending on how the consumers value the service and how well they are prepared to cope with any interruptions since it is uneconomical to provide a highly reliable service to everyone it would be desirable to have a scheme by which those with higher shortage costs get a higher priority of service two major points arise when we consider allocating service by priorities first the utility can not know the shortage cost to each consumer but only a distribution of the shortage costs in the population perhaps through a sample survey the utility thus is not in a position to determine what priority a consumer should have and has to let the consumer choose the priority from a menu of prices and priorities second the utility must have a mechanism by which consumers may be cut off in their priority order if priority service is to be feasible

optimal regulation under uncertainty this paper is concerned with the problem of price regulation when demand is uncertain uncertainty gives rise to substantial difficulties in determining both the return a firm s owners should be provided and a set of prices capable of producing that return we argue that conventional approaches to price regulation are incapable of attaining the economically desirable objectives of efficiency and an equitable return to investors the deficiencies in current practices are attributable to the separation of the risk measurement return determination and price setting activities in the conventional approach we present a model of the regulated firm that synthesizes contemporary financial market theory and the theory of the firm under uncertainty in our approach the income stream produced by the firm is valued ex ante in the financial market according to investors perceptions and preferences over risk return characteristics we portray the firm as producing risk and return by choosing among available production technologies to maximize its market value given the prices set by regulators within this framework it is shown that regulators can choose the lowest prices consistent with an equitable return to investors we also show that prices so chosen induce the choice of the optimal technology by the firm in the traditional regulatory framework as thoroughly described and explained by bonbright 3 the goal of regulators is to set rates in such a way that all costs are covered including a return on invested capital commensurate with the risk of equity investment determination of the latter is difficult at best it is generally agreed that 1 the fair return depends on risk 2 the return required by investors as compensation for risk bearing is most accurately measured by observing the returns to competitive firms in otherwise similar circumstances and 3 estimation of required returns by observation of other regulated firms is generally inappropriate since the risk and regulation effects are confounded more recently myers 13 has argued for the application of finance theory to rate determination within the traditional regulatory framework in particular he argues that the capital asset pricing model capm developed by sharpe 14 lintner 9 and mossin 12 is especially well suited for this purpose since a single quantitative measure of risk is relevant in that model further since the capm offers an explicit equilibrium risk return relationship information about the risks and returns of all firms can be directly employed in determining the fair return to a regulated firm

the role of energy economists in promoting sustainable energy development abstract the role of energy in pursuit of policies seeking sustainable development is crucial correspondingly the work of energy economists will be affected in many traditional areas of analysis and will require enhanced scope and new expertise this would lead to a better understanding of the place of natural resources in the production process better delineation of trade offs between avoidance of ecological degradation and economic stagnation and more interdisciplinary feedback

toward consilience between biology and economics the contribution of ecological economics abstract during its ten year history ecological economics has made a real difference in the way economists look at the natural world and in the way biologists look at the economy in this survey article we examine the contributions to the journal in terms of e o wilson s concept of consilience that is his argument that the methods and assumptions of any field of study should be consistent with the known and accepted facts in other disciplines in particular we examine the contributions of ecological economics to reconciling the economic theory of the consumer and producer with biophysical reality

rate of return regulation with price flexibility rate of return regulation is the standard technique used to try to correct for the allocative inefficiencies arising from granting monopolies to firms in industries exhibiting economies of scale the idea behind current practice is that regulators should set an output price such that the firm s profits will provide investors with a fair expected rate of return on invested capital while there has been considerable debate on the appropriate rate of return the modern view as originally expressed by myers 1972 is that the fair rate should be equal to that expected by investors in other firms with equivalent risk this paper considers a change in rate of return regulation that will dominate standard price setting rather than fixing the price that the regulated firm must charge the regulator should grant the firm the option to charge any price less than or equal to a ceiling price hereafter called the price flexibility option if the regulated firm has this flexibility both the consumers and the firm are at least as well off this option to raise and lower prices within a range specified by the regulator will increase the ex ante value of the this paper considers a change in rate of return regulation that will dominate standard price setting rather than fixing the price that the regulated firm must charge the regulator should allow the firm to charge any price less than or equal to a ceiling price we demonstrate the advantages of our proposal and develop a methodology for determining fair regulatory ceilings the methodology explicitly takes account of the effect of regulation on financial risk and we develop a technique for measuring the importance of this effect finally an example is introduced to demonstrate our techniques and to show the potential quantitative importance of the analysis the authors thank alan marcus michael salinger anjan thakor and two anonymous referees for helpful comments it is with great sadness that we report that beth hayes was killed while riding her bicycle shortly after the completion of this paper 1 for a discussion of this debate see brennan and schwartz 1982 p 508

regulator selection and endogenous systematic risk a major issue in the financial literature of regulated industries is whether the cost of capital is endogenous to the regulatory process cross spectral estimates of the market model are used to determine if the method of regulator selection contributes to either frequency dependence or phase shift lead lag in electric utility systematic risk it is determined here that electric utilities regulated by elected commissions experience frequency dependence in systematic risk this finding lends support to the assertion that the cost of capital is endogenous to the regulatory process

economic development and environmental quality a reassessment in light of nature s self regeneration capacity abstract we study the relationship between economic development and consumption of natural resources using a vintage capital model consumption of natural resources is assumed to generate pollution part of which will be absorbed by nature s self regeneration capacity we find that during the transition dynamics the shape of the pollution output relationship will depend on the parameter determining nature s self regeneration capacity using footprint and biological capacity data we show empirically in a repeated cross section of countries that the shape of the pollution output relationship indeed depends on countries capacity to regenerate part of the resources they consume from nature

reconsidering monetary policy an empirical examination of the relationship between interest rates and nominal gdp growth in the u s u k germany and japan abstract the rate of interest the price of money is said to be a key policy tool economics has in general emphasised prices this theoretical bias results from the axiomatic deductive methodology centring on equilibrium without equilibrium quantity constraints are more important than prices in determining market outcomes in disequilibrium interest rates should be far less useful as policy variable and economics should be more concerned with quantities including resource constraints to investigate we test the received belief that lower interest rates result in higher growth and higher rates result in lower growth examining the relationship between 3 month and 10 year benchmark rates and nominal gdp growth over half a century in four of the five largest economies we find that interest rates follow gdp growth and are consistently positively correlated with growth if policy makers really aimed at setting rates consistent with a recovery they would need to raise them we conclude that conventional monetary policy as operated by central banks for the past half century is fundamentally flawed policy makers had better focus on the quantity variables that cause growth

sustainable economic development and the environment theory and evidence the relationship between growth and pollution is studied through a vintage capital model where new technologies are more environmentally friendly we find that once the optimal scrapping age of technologies is reached an economy may achieve two possible cases of sustainable development one in which pollution falls and another in which it stabilizes or a catastrophic outcome where environmental quality reaches its lower bound the outcome will depend on countries investment path and their propensity to innovate in environmentally clean technologies both of which are likely to differ across economies empirical results using long time series for a number of developed and developing countries indeed confirm heterogenous experiences in the pollution output relationship

economic growth quality environmental sustainability and social welfare in china provincial assessment based on genuine progress indicator gpi abstract in order to devise scientific and sustainable development strategy it is vital to assess the quality of economic growth as a useful complement to traditional economic indicators gpi s most reputed virtue is its great improvement in evaluating environmental and social costs in this paper we estimate the gpi for all 31 provinces in mainland china from 1997 to 2016 gpi estimation is highly sensitive to income inequality climate change damage and depletion of non renewables we address contestable methodological assumptions associated with the three items which have been usually ignored in empirical studies we use the atkinson index in place of the gini index as a measure of income inequality we avoid the problematic duplicated counting of climate change damage and the unjustified cost escalation factor in depletion of non renewables our results show that first gpi per capita has recently declined in some provinces unveiling a threat to social welfare and sustainability second the relative threshold effect the progress of social welfare promotion is slower than the expansion of economic scale has been found in many provinces third resource consumption and environmental pollution especially water pollution and carbon emissions would generate substantial welfare losses

environmental policy under a non market discount rate abstract this paper looks at pollution emissions when a non market discount rate is used to evaluate environmental policy and policy is subject to continuous review through time it is shown that a non market rate leads to time inconsistent policy future regulators will want not to follow the current regulator s optimal plans even when the current regulator has perfect foresight and there is no uncertainty therefore the discount rate has different effects depending on whether government can commit to future environmental regulation we then show in a simple linear model that when the environmental discount rate is below the market rate pollution is higher under no commitment than under commitment even under no commitment however a lower discount rate leads to lower emissions we argue that the debate might be better framed over prices i e the value of the environment in the future rather than the discount rate this treatment removes the inconsistency problem yet ensures that future generations interests are represented in policy decisions

making monetary policy objectives and rules what is it that monetary policy makers do and how do they do it the simple answer is that a central banker moves interest rates in order to maintain steady real growth and stable prices in this essay i examine the issues that arise in framing the problem faced by monetary policy makers i begin with a discussion of how over the past decade or so central banks have been made more independent and more accountable the result has been the virtual elimination of the inflation bias problem that is caused by political interference in the monetary policy process and better overall macroeconomic performance the essay proceeds with an example of a formal version of the policymakers problem describing their objectives and the information they need to formulate a policy rule i conclude with a discussion of a simple versus complex policy rules the impact of uncertainty on policy making and how central bankers use formal modelling in making their day to day decisions copyright 2000 by oxford university press

the use of the discount rate in a cost benefit analysis for different uses of a humid tropical forest area abstract the linkage between ecology and economics can be made by describing our physical surroundings as a collection of possible uses these are called environmental functions as soon as the use of functions compete with each other the environment has an economic aspect the main conflict boils down to using environmental functions such as the functions of a tropical rain forest in an unsustainable way by maximizing production in the short run on the one hand and using functions sustainably in order to benefit from them in the long run on the other the intensity of preferences for the future availability of functions cannot be established from this it follows that the level of the discount rate when calculating long term environmental effects can also not be set using the market interest as the discount rate for calculating the present value of long term environmental costs and benefits means that the preferences for sustainable use of the environment amount to zero for in that case the present value of a dollar earned 100 years from now is practically nil this is a strong supposition the correctness of which cannot be proven unfortunately most cost benefit analyses such as those of the world bank and a recent study of the world resources institute repetto et al 1989 are based on this supposition

sizing the earth recognition of economic carrying capacity abstract this paper argues that the biophysical properties of a finite earth and the realities of economic transformation determine the economic carrying capacity of our planet economic carrying capacity takes the form of maximum global economic welfare derivable from the sustainable throughput flows of the ecosphere this is fleshed out by development of a welfare return curve plotted as a function of economic scale the latter is measured by entropic throughput the economic ecological connection is made by employing the ehrlichs equation pat impact as the dual entity being measured on the abscissa this curve shows an initial acceleration which eventually flattens reaches a maximum carrying capacity and is followed by declining welfare the shape of this curve is determined by the rising costs associated with the ecosystemic impact of increasing throughput rates as required by a growing economy the primary thrust of the argument is that not only are economic scales that exceed throughput sustainability definitionally impossible to maintain in the long run but because of declining welfare they are not even desirable in the short run historical movement along this curve is discussed reflecting growth in the global economy an analysis of rising impact costs and the serious mistake of advocating growth to meet these costs is given employing the notion of a social trap also investigated are several additional causes and likely results of pending economic overshoot among these are inter generational penalties of reduced welfare potential from a planet degraded by economic overgrowth several overshoot avoidance prescriptions are offered as well as a discussion of stasis and contraction