Inefficiency and sustainability

• Discrepancy between model and reality leads to inefficiency and unsustainability.
• Study of both simple and comprehensive models quantifies inefficiency.
• High inefficiency implies the need for new sustainability tools.
• Institutional changes may be more important than investment.
• Sustainability-supporting inefficiency can insure against decreasing utility.

Sustainability goals of a social planner in an inefficient economy may require a wider range of tools than prescribed by a model that assumes dynamic efficiency. The need for additional tools can be shown by considering both the planner׳s model and a more comprehensive one that imitates real life. A new tool is necessary if the level of inefficiency, resulting from the discrepancy between the model and “real life”, can undermine any feasible effort advised by the planner׳s model. This study assumes that the planner applies the policies developed for a simple model, whereas the real economy is distorted by neglected effects that influence utility, production, the balance equation, and the dynamics of the natural resource stock. The resulting inefficiency affects the dependence of current utility change on investment. The analysis shows that a prescription for sustainability requires estimation of possible inefficiencies and coordination of genuine investment with inefficiency-reducing policies, including changes in accounting systems and institutions.