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Decisions in Economics and Finance

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22-11-2018

Environmental depletion, defensive consumption and negative externalities

Author: Alessandro Fiori Maccioni

Published in: Decisions in Economics and Finance | Issue 2/2018

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Abstract

This paper analyses economic dynamics in a context in which the production and consumption choices of economic agents generate environmental degradation. Agents can defend themselves from environmental degradation by increasing the production and consumption of output, which is assumed to be a (perfect) substitute for environmental quality. We consider the cases in which agents can coordinate their actions or not, and we show that if the dynamics is conditioned by negative externalities (so that there is no coordination), then a self-reinforcing mechanism may occur leading to production and consumption levels higher than the socially optimal ones. A complete analysis of the dynamics and of the welfare properties of the stationary states is provided.

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This standard procedure (see Romer 1989) is widely used in the literature on positive and negative externalities.

To improve clarity, we omit the analysis of the case for which \(c \alpha -\beta N = 0\), because the resulting dynamics of the system is not robust to uncertainties or perturbations.

In the following, we will refer to the term ’sustainable’ to denote consumption patterns leading to a fixed point in which \(E>0\). Vice versa, we will use the term ’unsustainable’ to denote consumption patterns leading to \(E=0\).

Remember that we measure the quantity of private goods consumed in the economy by the effort that is necessary to produce them, that is, by \((l_1+l_2)N\).

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Title: Environmental depletion, defensive consumption and negative externalities
Author: Alessandro Fiori Maccioni
Publication date: 22-11-2018
Publisher: Springer International Publishing
Published in: Decisions in Economics and Finance / Issue 2/2018
Print ISSN: 1593-8883
Electronic ISSN: 1129-6569
DOI: https://doi.org/10.1007/s10203-018-0226-z

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