Economic models are prepared utilizing stylized facts and available information about the economy and economic agents. The overwhelming dependence on market efficiency and limitations of cost benefit analysis tend to underplay the role of environmental resources in growth process. What is vital to note is that invisible positive externalities of environmental resources are under-estimated but negative externalities generated during production and consumption activities are also under-estimated. The end result is that economic activities creating negative externalities are boosted due to inefficiency of markets and public policy failure. There is however a paradigm shift in economic thinking and environmental contributions to economic growth are well recognized. Technically speaking, environmental contributions to growth are part of total factor productivity, which derives its strength from environmental and other missing factors in the model. Further analytical advances are necessary to isolate the environmental impacts.Besides the concept of externalities in the context of environmental degradation, an analysis is presented to explain the existence of externalities in relation to sustainable development by bringing in historical (inter-temporal) externalities, overlapping generational externalities and intergenerational externalities.
We argue that pollution anywhere is a danger for pollution everywhere. In other words, a simple application of polluter pays principle would not help in recovering the cost of damage as polluters are spread at large. Conventional environmental instruments are handy but not adequate to handle border less pollution. While integration of sustainability in development strategy is crucial, it is necessary to enact mandatory laws. Both preventive and restoration expenditures should be made mandatory on the lines of mandatory corporate social responsibility in some countries. A separate budgetary head would need to be created. This budget should be run on the model of performance budgeting purely in terms of environmental projects. What is more instructive is that since externalities have no national boundaries, tackling global externalities would necessitate intergovernmental and international co-operation. This would ensure the application of international best practice technologies and knowhow in environmental governance. While the success of international agreements is slow, climate clubs may hold promise. Small islands however should be adopted as experimental laboratories, which would benefit both the threatened islands in particular and global environment in general.
Shyam Nath, “Economic Models, Growth and Sustainable Development”, in Youth Conference on Small Island Developing States and Climate Change, Indian Ocean Commission/European Union in Mauritius, 2015.