Intergenerational Efficiency in Log-linear Cobb-Douglas OLG Models

Abstract

Based on the three statements presented in Chap. 2, i.e. (i) exhaustible resources are not scarce, (ii) fossil resources are unnecessary or inessential, and (iii) backstop technology is available, it may appear that the definition and characterization of both intergenerational efficiency and intertemporal market equilibrium are no longer a problem. Unfortunately, this is not in fact the case. Even when both exhaustible and renewable resources are economically abundant, and may therefore be excluded from our modeling framework, an intertemporal market equilibrium may still remain intergenerationally inefficient. We intend to show how such a position may come about in the following pages. By way of illustration we use the most simple version of the Diamond–type (Diamond, 1965) overlapping generations economy with log-linear intertemporal utility and Cobb-Douglas (CD) production function.