ANALYSIS
Energy price disparity and public welfare
Paul H. Templet *
Institute for En6ironmental Studies,Louisiana State Uni6ersity,42Atkinson Hall,Baton Rouge,LA70803,USA Received 2 June 2000; received in revised form 28 August 2000; accepted 28 August 2000
Abstract
The differences in the price of energy to economic sectors are linked to a number of system parameters and to public welfare. There are large disparities in energy prices within states when comparing residential and industrial prices although neoclassical economics predicts one price in markets. The large disparities between the two sectors across states negatively affects the efficiency of resource allocation, creates subsidies for those getting the cheap energy and results in unequal access to energy. These in turn lead to inefficient partitioning of energy between products and waste, higher pollution, leakage of wealth and poorer energy use efficiency, i.e. high energy intensity. States with large energy price disparities between sectors have statistically higher poverty, lower incomes, more pollution and use more energy but with less efficiency. Higher energy price disparities also result in higher throughput per unit of output thus reducing the chances for sustainability and lower public welfare. © 2001 Elsevier Science B.V. All rights reserved.
Keywords:Energy; Welfare; Price disparity; Sustainability; Diversity; Energy intensity
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1. Introduction
Energy is the prime mover, essential to life, health and economic welfare. Without it no work can be done, no products can be produced and no economy can exist. For these reasons, and others, the price of energy paid by an economic sector assumes importance. Price determines allocation and availability, i.e. when price is lower for a sector then more energy ‘goods’ are available for use per dollar spent on energy. Secondly, because
there are no substitutes for energy it is critical to economic processes and its price assumes unsus-pected importance. There are different forms of energy and it can be used more or less efficiently but energy is necessary for all economic activity. Finally, if price is an intensive state function (‘thermodynamic-like potentials’, Amir, 1994), then price differences may affect economic system behavior in ways not understood by conventional economics. For these reasons, and possibly oth-ers, energy price distortions can be expected to have serious ramifications.
There are large energy price disparities between economic sectors within states (US Energy Infor-* Tel.: +1-225-3886428; fax:+1-225-3884286.
E-mail address:[email protected] (P.H. Templet).
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mation Administration, 1998). For example, in 1995 the average US resident paid 2.4 times as much as firms in the industrial sector for an equal amount of energy while Louisiana residents pay over four times as much as their industry pays (Table 1). Although economic theory posits one market price for goods, i.e. the market clearing price, the energy price differential persists, and widens, across sectors over time (Fig. 1) suggest-ing an imperfect market structure. In many states energy is currently supplied by a few large firms, which function as oligopolies, although this is changing with deregulation. Because some energy markets in many states are still partially regulated by State Public Utility Commissions the price differences might also be attributed to political interference in markets. If industry is successful in having their energy price lowered through politi-cal means then they are externalizing part of their
production costs to other sectors that, conse-quently, are paying higher prices, a kind of back-door tax.
Imperfect markets and externalities mean that market failure occurs because prices do not in-clude all costs, price signals are misleading and Pareto optimality cannot be achieved. The differ-ence in prices between sectors means the marginal product of energy is not equalized among sectors, and consequently, total product and utility are not maximized. In addition, the purchasing power of citizens declines as prices rise so public utility is negatively affected and public welfare should de-cline (Gowdy and O’Hara, 1995). A final consid-eration is that the allocation of resources between sectors may no longer be efficient or optimal because of market failure, and that may also affect public welfare. Economic theory recognizes that market failure occurs, but does not tell us
P
%GSP leaked Leakage 1997
Diversity % of energy to
Energy price
State Energy Energy Natural gas
Manufacturing GSP price disparity
disparity intensity $GSP per subsidy
Residential/ MJ/$ capita Releases (lb) per $ per capita
job industry
204 27.4
Alabama 3.14 1.23 23.07 13.9 2897 113 2.31
308 59.2 92 2.51
2.76 1.28 21.10 16.4 128 37.7 63 1.97
Arkansas
19 89.0 −49 1.74
4638
California 2.13 1.33 9.35 17.1
22 89.9
Colorado 1.67 1.38 11.16 16.3 4429 −172 1.68
22 82.9 −336 2.28
3516 1.62
Connecticut 1.37 7.53 10.4
13 529
2.63 1.33 10.28 35.8 58 68.9 48 2.24
Delaware
719
3.93 1.34 11.81 3.2 180 63.7 192 3.01
Florida
99 59.1 4 1.74
5701
Georgia 2.44 1.34 14.14 21.9
26 96.9 31 NA
Hawaii 2.69 1.16 7.70 21.5 6361
236 41.0 −33 1.53
Iowa 2.00 1.31 16.68 18.8
110 53.4
Kansas 2.10 1.33 18.21 13.6 3198 −73 2.20
123 47.3 −111 1.55
4926 21.62 22.0
Kentucky 1.92 1.26
7215
4.37 0.95 37.43 29.1 967 20.9 216 3.31
Louisiana
Maryland 2.42 1.38 10.85 3.0
13 90.5 −366 2.04
Massachusetts 1.50 1.38 8.61 12.8 3871
55 58.9 −295 1.31
2.59 1.30 22.25 16.7 268 26.9 30 1.95
Mississippl
137 49.5 −197 1.48
3817
Missouri 1.74 1.36 13.65 15.8
1,755 14.2 −176 1.06
Montana 1.68 1.32 24.08 9.6 1839
73 61.6 −159 1.73
5369 1.79
Nebraska 1.37 14.82 21.3
6262
New Jersey 2.12 1.37 10.87 10.4
741 27.8 −104 1.78
New Mexico 1.83 1.31 15.32 28.0 6568
33 86.4 −56 1.80
4464 7.51 14.8
New York 2.20 1.38
5901
2.46 1.36 13.36 23.1 92 46.5 10 1.94
North Carolina
4206
2.63 1.23 26.96 19.7 104 67.3 39 1.61
North Dakota
104 48.8 −218 1.39
3664
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Table 1 (Continued)
%GSP leaked Leakage 1997
Diversity % of energy
Energy price
State Energy Energy Natural gas
$GSP per Manufacturing to GSP subsidy price disparity intensity
disparity
capita Releases (lb) $ per capita MJ/$
Residential/
industry per job
120 51.8 88 2.45
12.6 2504
22.07 1.32
2.98 Oklahoma
14.9 3557 100 58.5 −62 1.97
1.34
Oregon 2.07 14.74
85 64.3 −57 1.84
2181
14.11 9.1
Pennsylvania 2.21 1.34
1512
1.88 1.37 10.65 6.4 22 78.1 −169 1.96
Rhode Island
4091
2.89 1.28 18.45 18.7 136 38.9 86 2.42
South Carolina
84 65.2 −126 3.15
6164
South Dakota 1.92 1.36 14.22 25.7
1.89 1.34 16.56 4231 189 34.6 −123 1.73
Tennessee 17.6
222 42.2 168 3.14
6106 3.84
Texas 1.13 22.81 23.6
4545
2.06 1.33 15.88 21.0 706 19.0 −53 2.03
Utah
3 89.9 −505 2.01
Vermont 1.36 1.37 12.16 10.0 2222
130 57.4 101 2.14
4293 2.99
Virginia 1.38 12.25 16.0
3286
2.05 1.33 16.42 12.9 66 68.4 −65 2.15
Washington
13.4 2521 254 34.3 45 2.71
West Virginia 2.66 1.25 25.19
49 61.8 −120 1.97
3592 14.8
14.81 Wisconsin 1.93 1.31
13 361
2.08 1.11 27.23 40.8 850 37.7 −68 1.52
Wyoming
15.2 3883 113 55.8 0 2.08
how it relates to public welfare, and its ramifica-tions are rarely discussed.
One biophysical measure of economic systems, energy flow diversity, provides one means of viewing the effects of market failure and the misallocation of resources. In an earlier paper (Templet, 1996), the author presented an empiri-cal means of estimating diversity in economic systems using the broad economic sectors as en-ergy nodes (analogous to species) in the Shan-non and Weaver (1949) diversity equation. The relationship of diversity (H) to GNP per capita, a measure of development, was found to be pos-itive, logarithmic and significant in a cross-sec-tional analysis across countries. As a country’s economy evolves it appears to become more di-verse, rapidly at first relative to GNP per capita, and then more slowly as GNP per capita in-creases. As one might expect, those countries with the highest diversity are the most highly developed and have the highest GNP per capita. More recently, the author related increased di-versity to increased energy efficiency and a low-ered energy intensity and to increases in the capacity of economic systems to produce goods and services (Templet, 1999). Darwin (1859) first suggested that an increase in productivity was related to diversity in ecological systems. Tilman et al. (1996) investigated Darwin’s suggestion for grassland ecosystems and found the relationship of diversity to productivity to be positive and significant. Ulanowicz (1986) finds that diversity and the capacity to produce are related in eco-logical systems, and provides a mathematical formulation.
Misleading price signals and poor allocation also affect the sustainability of a system by in-creasing throughput per unit of output. Sustain-ability requires that economic throughput be within the source and sink capacities of the en-vironment (Daly, 1990). The enen-vironment is the source of the natural resources that are used in the economic system to produce goods and ser-vices and is where wastes go. These are the ‘source’ and ‘sink’ functions that constitute nat-ural capital, which is essential to the develop-ment of economic capital. All production processes require inputs of materials and energy
and create outputs of goods and services along with waste. In addition, all products must either be recycled at the end of their useful life or become waste. For these reasons, the economy is dependent on the environment although con-ventional economic wisdom generally discounts the value of natural capital because the market captures its value only partially. If disparity in energy prices increases throughput in an econ-omy then system throughput is higher and is less sustainable. Misallocation of resources also negatively affects natural capital by consuming more of it and by imposing higher waste loads. Our life support system, which provides essential goods and services such as clean air and water and numerous other services, is dependent on maintaining natural capital. One measure of nat-ural capital puts its value considerably above that of man made capital (Costanza et al., 1997). It is apparent that most developed coun-tries have exceeded their source and sink capac-ities (Templet, 1995a; Wackernagel and Rees, 1996); global climate change is only one of the many manifestations of excessive consumption and waste creation, i.e. of economic throughput exceeding sink capacities.
The question this paper seeks to answer is whether energy price disparities affect public welfare and how. Investigating the linkages be-tween energy price disparities, public welfare, sustainability, diversity and other system mea-sures should provide some answers.
2. Methods
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analysis because it was useful for a comparison across states when comparing with variables like energy intensity or partitioning between product and waste because the portion of gross state product (GSP) attributable to each energy type is unknown. In addition, I believe it is total energy used to generate output that is ultimately more important to an economy than the energy mix.
However, because all economies use mixes of energy sources, e.g. some use mostly coal while others use oil and gas, there is concern that the differing mixes of energy sources might affect this analysis. The different energy types have different prices but the prices generally reflect the ‘useful-ness’ (quality) of the source. For example, the generation of electricity requires about 3 U of fossil fuel energy to obtain 1 U of electrical energy, assuming a 33% conversion rate. For that reason the price of electricity, the highest quality energy, is at least three times that of fossil fuels. In fact, the US average price of electricity is three times that of oil, five times that of natural gas and 14 times that of coal. The price ratio is high for coal because it is less useful, even on a Btu basis, due to its polluting and handling characteristics, so its price is lower. Prices also reflect the ease or difficulty of delivering energy, the losses incurred in doing so and the energy volume delivered.
To check for the possibility that the mix of fuels would affect the outcome of this analysis, I developed a price disparity ratio for natural gas alone for states (Table 1). It was found to be significantly related to the total energy price dis-parity (r=0.70), the total energy intensity (r= 0.24) and energy flow diversity (r= −0.35) across states. In this context, i.e. a comparison across states, the use of total energy, regardless of the mix of energies, appears to be appropriate. For a more detailed explanation of the method used to determine energy price, see Appendix A of the US Energy Information Administration (1998) report. Cross-sectional simple linear regressions using the 50 states are used to illustrate relationships because there is no comprehensive model yet available on which to carry out more detailed analyses. Socioeconomic data are taken from the US Bureau of the Census (1997, 1998).
3. Results
The results presented here are for g1995 unless otherwise stated.
3.1. Energy price disparity across state sectors
The difference in energy prices across economic sectors within a state is growing over time in many states. Fig. 1 shows the residential and industrial energy prices for the US and Louisiana over time. Louisiana is of interest because its industrial sector uses 67% of all energy used in the state, the highest percentage of all states, and for other reasons that will become apparent. The divergence in prices is evident and has been in-creasing rapidly since 1980. The greatest change occurred in the 1980s. The divergence can be expressed as price disparity, i.e. the ratio of the residential price to the industrial price. It is shown in Fig. 2 for the period 1970 – 1995 for selected states; Table 1 contains data for all 50 states. The divergence declined between 1970 and 1975, per-haps in response to the OPEC oil embargo of 1974, but increased rapidly thereafter. For a brief time around 1980, citizens and industry paid nearly the same price for energy (price disparity
1) in Massachusetts. As one might expect, a
higher price disparity also leads to a significantly higher percentage of total energy being consumed by the industrial sector (r=0.43). Using a simple linear regression energy price disparity across the 50 states can be shown to relate significantly and positively to unemployment (r=0.34) and poverty (r=0.43) and negatively to income per capita (r= −0.28).
Fig. 2. Energy price disparity for selected states over time.
the commercial sector in Louisiana is paying 20% above the US average for commercial energy and high price disparities may be penalizing smaller businesses. Low prices for industry and high prices for residents are subsidies for the industrial sector, which amount to many millions of dollars annually. For example, if Louisiana industry paid the US average industrial price for their energy, their annual energy expenditures would rise $1.8 billion. A higher price would promote energy efficiency, something sorely needed in Louisiana whose energy flow diversity is the lowest and declining, and whose energy intensity is the highest of all states.
3.2. Di6ersity in economic systems
diver-P.H.Templet/Ecological Economics36 (2001) 443 – 460
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sity, i.e. structure (Odum, 1969), and less waste, thus reducing marginal entropy (Binswanger, 1993). Ulanowicz (1986) notes that for ecological systems ‘… a drop in diversity relates to a dimin-ished capacity of the system to grow and develop’. Assuming isomorphism across system types (Bertalanffy, 1968, Bertalanffy, 1975) economic system diversity and productivity is also expected to generally increase during development (Tem-plet, 1999).
The diversity (H) was calculated for states with the Shannon and Weaver (1949) formula using the fraction of annual energy flow through the principal sectors as the importance factors pi, where iis the number of sectors.
H= −SUMi(pilnpi) (1)
Due to lack of disaggregated, data we are lim-ited to four sectors — industrial, commercial, residential and transportation — so we can only sum over four terms, and diversity within these four sectors is invisible. More specific energy data for smaller sectors would allow the number of nodes to increase thus expanding and improving the H term calculated here. The diversity over time for the US and selected states is shown over time in Fig. 3 and in Table 1 for all states. In examining economic diversity for a number of states over time, it is apparent that while many states are improving, some are not and at least
one, Louisiana, is declining in diversity. New Jersey has the highest diversity shown and close to the theoretical maximum of 1.39 at which the energy flows would be evenly distributed across the four sectors. The US increased its diversity rapidly just prior to 1970 but has not changed much since. Texas increased until /1985 and has been stable or slightly declining since. Louisiana has been declining since t1980 and is the lowest of all states, principally because 67% of state annual energy consumption is industrial, the highest of such figures for any state. By that measure Louisi-ana is the most heavily industrialized state in the US. Louisiana also has the highest energy intensity of all states. Diversity is significantly and posi-tively related to employment and income per cap-ita using simple linear regressions. Table 1 shows the b1995 diversities calculated for the 50 states.
3.3. Energy intensity
The energy intensity is the amount of energy used to create a dollar of GSP (see Fig. 4 and Table 1 for state energy intensities) and is an inverse measure of energy efficiency. There is a significant and positive relationship between the energy price disparity and energy intensity (r= 0.49) across the 50 states, which indicates that disparity in prices leads to inefficiency in the use of energy. There is a significant and negative relation-ship (r= −0.80 or −0.88 with Hawaii removed) between diversity and energy intensity (Fig. 5). As diversity increases energy intensity declines, both over time and in cross-section analyses. This same relationship has been observed for countries. In addition, a declining energy intensity has been shown to result in the improvement of many environmental, development and socioeconomic indicators (Templet, 1996). Hawaii appears to be an outlier; although its diversity is close to the median, its energy intensity is much lower than predicted by the linear fit in Fig. 5. This may be due to Hawaii’s isolation, which promotes high energy prices and greater efficiency than in main-land states. The low energy intensity may also be due to Hawaii’s tropical climate, which reduces energy consumption, and its heavy reliance on low energy intensive tourism.
Most socioeconomic measures worsen as energy intensity rises (Templet, 1996), e.g. personal in-come/capita significantly declines with rising en-ergy intensity (r= −0.77) across the states. The reason for higher incomes in more energy efficient states seems to lie in a better partitioning of energy to useful products (higher GSP) and less to waste (Templet, 1996), less leakage of wealth from the state and a better environment which tends to attract higher growth-rate economic development. The high growth sectors in the US economy, i.e. the knowledge or information sectors, tend to be less energy intensive and more information inten-sive per unit of output, which suggests that infor-mation is a partial substitute for energy.
3.4. Energy use,partitioning and pollution
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Fig.
4.
1995
Energy
intensity
by
Fig.
5.
Diversity
vs.
energy
intensity
by
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from manufacturers normalized by manufacturing jobs by state to adjust for industry size (Templet, 1993a,b).
From a system perspective this is not a surpris-ing result. As the input of energy into the eco-nomic system increases, it can either generate more goods and services (GSP), the desired out-come, or more waste, or both. A multiple regres-sion across the states using 1995 GSP to represent the production of goods and services and toxic releases (TRI) to represent waste (US Environ-mental Protection Agency, 1997) for 1995 gives:
Energy input (PJ)
=8.11×GSP ($92 billion)+
18.45 4.09E(−5)×
TRI (kg)14.20 (2)
where r2=0.97 with zero intercept (0.95 with −99.05 intercept), PJ is Petajoules (10E15 J), TRI is in kilograms, dollars are 1992 dollars and t statistics are shown below the two independent terms.
Fig. 6 shows state energy consumption calcu-lated from Eq. (2), plotted against actual energy consumption, and verifies that the equation is a useful predictor of state energy use. Using Eq. (2), we can calculate the relative amount of energy being used to produce GSP (partitioning) by state by multiplying out the first term on the right side of Eq. (2) and dividing by the calculated total energy. The result (Table 1) is useful in a compar-ative sense, but is probably too optimistic because the waste term (TRI) does not represent all waste created within a state but only toxic waste. Those states with low TRI releases, e.g. Vermont and Hawaii, appear to be more efficient than they are because their toxic waste is low. If more complete waste data were available, the calculation might be more useful in an absolute sense.
In high disparity states, a larger fraction of the total energy input goes to waste heat and pollu-tion, which makes them less efficient than low disparity states. This effect can be seen in the partition coefficients developed previously for countries and states (Templet, 1996) where effi-cient states partition more energy into goods and
services than high energy intensity states. Because GSP is related to income those states which parti-tion more energy into goods and services and less into waste can be expected to have higher per capita incomes (Fig. 7), all else being equal. Effi-ciency in the use of energy, and presumably other resources, results in higher incomes and greater public welfare.
3.5. Leakage
Leakage, as defined here, is that part of a state’s GSP that is in excess of income within the state and thus contributes to income elsewhere. It ranges from 40% of GSP in Alaska and Wyoming to 3% in Florida and Maryland (Table 1). Extrac-tive states tend to export more of their wealth, e.g. Louisiana, which exports energy and also exports 29% of its GSP wealth annually, while Texas exports 24% of its GSP. States like Florida and Maryland are retaining more of their wealth and may be importing income in the form of payments to shareholders, transfer payments and salaries earned outside of the state, e.g. Maryland resi-dents include many wage earners who commute to Washington, DC, to work. States having higher diversity export less of their wealth (r= −0.56) in analogy with mature ecosystems (Tilman et al., 1996), which export fewer nutrients than early successional ecosystems. Leakage is a major source of lost income and subsequent poverty for high resource use and high pollution states (Tem-plet, 2001), i.e. those whose industries, e.g. min-ing, manufacturmin-ing, and loggmin-ing, rely heavily on extractive natural capital.
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and by 1995 the gap was nearly three-quarters of a trillion dollars and climbing (US Bureau of the Census, 1997). A proportionate share of the earn-ings of those assets leave the US each year as payments to foreign shareholders, and thus an ever increasing share of GDP leaks away. Since GDP supports income, the more GDP leaked out of the US, the lower our incomes will be. US payments of income to the rest of the world exceeded US income receipts from abroad in 1995 and are climbing (US Bureau of the Census, 1997).
The energy price disparity results in low energy efficiency that leads to a higher than necessary total energy use, much supplied by imports. The deficit in our balance of trade increases and facili-tates foreign purchase of US assets. Returns to those assets then leaks out of the US to other countries. In effect we are trading income produc-ing assets for oil. The tragedy is that imported oil would be unnecessary if we became as energy efficient as our European trading partners by conservation and by raising or equalizing prices for energy. Our wasteful energy practices appear to be resulting in a loss of potential income in the US, along with global climate change and other negative impacts.
3.6. Price disparity and energy subsidies
A price disparity above the US average results in a subsidy above the US average for the indus-trial sector because that state sector is, in all likelihood, getting energy cheaper than the US industrial average, and the states’ residential sec-tor is paying a price higher than expected. For example, see Fig. 1 where Louisiana residents pay higher prices than the US average for energy and industry pays less. The subsidy can be calculated relative to the US average energy price disparity using:
Energy subsidy=residential expenditures
×
1−US price disparity state disparity(3)
The US sector average energy price is set as the zero point for ease in calculation so the subsidy calculated by Eq. (3) is positive only if a state’s energy price disparity is higher than the US aver-age price disparity. Dividing the energy subsidy calculated with Eq. (3) by the state population then gives the energy subsidy per capita paid by a state’s residential sector, which is shown in Table 1. Positive numbers mean that a subsidy above the US average is being paid, negative numbers states’ residents are paying a subsidy below the US average, although all states’ residents pay some subsidy (for a derivation of the formula, see Templet, 1995b). It is possible, of course, that a portion of the subsidy may be justified due to delivery costs or other extenuating factors, but these state-wide costs would have to be substan-tially above the US average for the subsidy figure calculated here to be invalid.
Providing the subsidy to the industrial sector has negative public welfare consequences. Poverty and unemployment rise significantly while income per capita declines with an increase in the energy subsidy (Templet, 1995b). In addition, energy flow diversity declines significantly with a rise in sub-sidy across states, thus higher subsidies lead to a higher energy intensity, lower economic diversity and lower energy efficiency.
4. Discussion
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Fig. 8. Schematic of energy price and system interactions. energy producers and regulators to lower prices for
the industrial sector. But regardless of how price disparity occurs, cheap energy for one sector and higher prices for other sectors represents a subsidy for those with lower energy prices financed by the ‘tax’ implicit in the higher price paid by the other sectors (Templet, 1995b). High energy price dispar-ity also means that a state is less sustainable because energy price distortions lead to less efficiency and diversity and more throughput, pollution and leak-age — that all conditions are antithetical to sus-tainability.
To put it positively, as systems evolve they become more complex with more components and more connections between them. Diversity is one means of measuring those changes. As the system becomes more interconnected it becomes more efficient in using resources because energy and material are passed between components where each uses the resource before discarding, it thus reducing entropy and waste. One level’s waste is another level’s energy supply. Allocation and par-titioning improve as energy flows equalize across components; efficiency follows and energy intensity declines. This leads to reduced throughput per unit of output, lower specific entropy and movement toward sustainability. Efficiency is a means to an end; ultimately, total energy throughput must be within the ecosystem capacity to supply energy and absorb waste. Sustainability is not shown in Fig. 8 because it is implicit in so many of the parameters. Diversity in economic systems is related to the efficiency of resource use and the level of economic capacity or output. Higher diversities result in lower energy intensity, i.e. lower energy consumed
per dollar of output, and less waste, so output rises per unit of energy input and pollution declines. As diversity rises and energy intensity declines, income per capita and economic health improve. These results indicate that economic diversity is an essen-tial requirement for sustainability. Diversity in economic systems is also related to resource alloca-tion. Economic systems that are low in diversity are suffering from misallocation of resources. Ineffi-cient allocation of resources also leads to poor partitioning of energy between products and waste so pollution rises and productivity declines. All have a negative impact on public welfare.
Sustainability requires a throughput consistent with the scale of ecosystem services (Daly, 1992). Price disparity results in resource use inefficiency, higher throughput, low diversity, and inequality in allocation. Economic systems that use resources more efficiently have lower throughputs for a given level of output and are, therefore, more likely to be sustainable. The net result is that high price dispar-ities are contrary to sustainability. States having economic sectors with low energy prices relative to other sectors exhibit high capture of energy, low diversity and efficiency, high leakage, and are not sustainable over the long term. In other words, they resemble eutrophic or immature ecological systems (Mageau et al., 1995).
dia-cussed here is generally paid to those sectors of the economy, that are large users of resources and large dischargers of waste (i.e. throughput-intensive sec-tors). In essence large appropriators of sources or sinks benefit from externalization because external-ities create subsidies for those doing the externaliza-tion (Templet, 1995b). For example, a firm that pollutes the environment is externalizing some of its pollution control costs and thus gains a subsidy in the form of retained dollars, which the firm would have otherwise spent to control or eliminate the pollution. The subsidies accrue to firms’ profit margin but the profits of publicly owned corpora-tions go to shareholders and management who are generally located in places other than poor states. The relationship of manufacturing value added per job, a profits surrogate, to the percentage of the GSP leaked from a state is significant and positive in a cross-sectional analysis; the higher the subsi-dies, and thus the profits, the more is leaked to other states. In Louisiana, which has the highest subsidies and the highest value added per manufac-turing job, only 71% of the annual GSP accrues to income within the state (US Bureau of the Census, 1997). The remainder, about $7000 per person annually, is exported to other states (and countries since some of the firms in Louisiana are foreign owned). If this wealth were to remain in Louisiana, its per capita income would equal or exceed the US average.
The export of wealth from intensive resource use, high pollution states raises serious equity and community health issues. Those states, whose economies rely heavily on extractive natural capi-tal, e.g. mining and manufacturing, tend to have lower incomes as wealth is leaked away. In addi-tion, health care expenditures are higher, indicating that public health is negatively affected by pollu-tion. Subsidies leaked from poorer states go to the richer states, creating large income disparities be-tween states. While leakage may be efficient from an economics point of view, it can lead to situations where states or regions of a country become analogous to colonies providing source and sink services with all of the environmental, socioeco-nomic, health and community ills associated with such exploitation. In addition, such regions are less sustainable because of higher throughput per unit
of output. A more comprehensive view of economic development takes the approach that development includes improving natural and social capital as well as man-made capital (Sierra Business Council, 1999), and none of the three capitals is sacrificed for the others. In this view, because total wealth is the sum of the capitals, a loss of any of the three diminishes the whole. In addition, public decisions are to be made in such a way that at least two of the capitals are improved and the third is not diminished — a new type of optimality. Unless our communities and our environment provide us with a good quality of life, which includes more than man-made capital, economic development is failing to improve public welfare.
5. Conclusion
The question asked in the introduction, i.e. whether market failure leads to reduced public welfare, is answered in the affirmative. High price disparity leads to higher externalities and subsidies and to market failure that, in turn, leads to ineffi-ciencies in the allocation and use of energy and to reduced diversity. Inefficient allocation reduces energy use efficiency, lowers output productivity and increases pollution. Increased leakage occurs where subsidies are higher and incomes decline. The net result is lowered public welfare. Because price disparities result in higher throughputs, sus-tainability is less likely. A final consideration is that systems, including economic systems, tend to evolve over time toward more complexity, diversity and efficiency in generating outputs, assuming conditions are favorable. However, if one economic sector consumes much of the energy flow within the economy, as in eutrophic systems, diversity will stagnate or decline, the economic system will evolve slowly or not at all, and public welfare will not improve.
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prices so that external costs are included, by taxation if necessary; restricting the influence of special interests in setting policies and prices; and maintaining aggressive pollution reduction pro-grams. These changes will result in more efficient allocation and partitioning of energy, less leakage and pollution, an increase in system diversity and lower energy intensity. The net result is better public welfare and more progress in the direction of sustainability.
Acknowledgements
The author would like to thank Herman Daly, Helmut Haberl and Andrew Ferguson for their useful comments.
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