Is Growth Sustainable?
One of the costs of an ever-growing economy is the strain that it places on the environment. As the population expands more and more, resources are required to sustain the population. This growth need not necessarily lead to environmental collapse. Instead, markets can be used to alter the incentives of individuals and firms as they face trade-offs in their use of resources.
Real GDP is not the only measure of economic well-being. One that measures ecological efficiency is the Happy Planet Index (HPI). It measures not just material well-being but also analyzes the countries' environmental impact. America may have the largest GDP, but that does not make the planet happy according to the HPI.
Demand for resources tends to increase the price of those resources. As the price increases, individuals and firms that use these resources face an incentive to use less in the case of nonrenewables. In the case of renewable resources, entrepreneurs gain an incentive to increase the production of the renewable resource. These incentives are powerful and efficient.
Renewable Resources
Consider the case of lumber, a renewable resource. Increased demand for lumber has led to an increase in the price of lumber. This price increase leads tree farmers to expand their output to meet the demand. The net effect of increased demand for lumber is increased demand for forests. Increased demand for forests makes the land more desirable and leads to more land being placed into forest production. Some would argue that if you cut down the trees, eventually there will be none left. However, this statement ignores economic incentives. Would there be more corn or less corn if people stopped eating it? If you answered less, you would be correct. If people stop eating corn, farmers have no incentive to grow corn. Likewise, if people eat more corn, then farmers grow more corn. The same is true with trees. Trees take longer to grow, though, and as a result they're priced much higher than corn.
Nonrenewable Resources
In the case of nonrenewables like coal, oil, and natural gas, markets provide incentives to both producers and consumers. As demand increases for these factors of production, the price increases. This leads to higher prices and higher costs of production for firms that use the resources. These higher costs provide firms with an incentive to become more efficient in the use of the resource. For example, if a firm uses natural gas in production and gas prices rise, the firm has a strong incentive to use its natural gas in the most efficient way possible. Firms that are wasteful and inefficient will find it difficult to compete against firms that use resources more efficiently. They'll eventually go out of business.
