On shadow prices for the measurement of sustainability

The objective of this research is to discuss the direction of the bias of the existing estimates of genuine savings (also known as adjusted net savings). Such estimates rely on observed prices and quantities of investment and natural resource extraction. This has two consequences: first, it causes an overestimation of the shadow price of productive natural resources; second, it leads to omitting the depreciation of environmental services and amenities. We use simple numerical models to determine the path of optimal development under different assumptions. We find that the existing estimates of genuine savings are likely to be biased upward for countries with high levels of pollution, and biased downward for natural resource extracting countries.