What Are the (Interrelated) Economic Concepts that Underpin Green Growth?
First, optimum growth—by which current economic activity (consumption, saving, and investment) provides a level of welfare for the present population that does not reduce the ability to provide for the welfare of future generations. This is the basis for “sustainable development”, which was defined in the 1987 UN Brundtland Commission Report as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. It means that an economy replaces depreciated capital and invests to meet those future needs. But “capital” is not just the conventional notion of physical assets, but also includes human capital (such as education and skills) and natural resources (such as land and water).
Second, externalities and public goods—by which economic activity incurs costs and benefits to society that are not always taken into account and attributed to those producers and consumers that generate them. The “negative” externalities in agriculture are often environmental, such as water pollution, loss of biodiversity, or natural resource depletion, while public goods include the preservation of aesthetic landscapes, or carbon sequestration in agricultural, in particular grassland, soils. The reason why such externalities and public goods are not taken into account is because they lack markets, or regulatory mechanisms, often as a result of poorly defined and enforced property rights. The upshot is that there is a distortion in resource allocation as “too much” pollution and “too few” public goods are provided.
Third, prices—by which the allocation of resources within a market economy is primarily determined by prices that reflect the changing nature of demand and supply. However, prices are affected by government policies—especially in the agricultural sector where production and other subsidies are pervasive—market structures (such as monopoly or monopsony), imperfect information, and underpriced natural resources (such as water), and the existence of externalities and public goods.