Abstract
This paper presents a simple and straight-forward static model of the micro-foundations of the environmental Kuznets curve, in which the relationship between income and pollution depends on the relative magnitudes of the diminishing income-compensated price elasticity of environmental amenity and increasing marginal propensity to earn environmental amenity out of non-environment income. The smaller the income-compensated price elasticity and the larger the marginal propensity to earn out of non-environment income, the earlier the turning point emerges. This key feature of our model generalizes the specific features of many existing models and generates many of their implications.
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Notes
See, for example, Grossman and Krueger (1995); Shafik and Bandyopadhyay (1992); World Bank (1992); Holtz-Eakin and Selden (1995); Selden and Song (1994); Hilton and Levinson (1998); Kahn (1998); Chaudhuri and Pfaff (1998); Dinda et al. (2000); Millimet et al. (2003); Galeotti and Lanza (2005); Deacon and Norman (2006); Stern (2006).
In a strong cautionary note, Arrow et al. (1995) point out that the feedback between ecosystem services and traditional industrial capital stock accumulation is not well understood, and thus, there may not be a clear signal of problems until a threshold is exceeded.
Such as more secure property rights, better enforcement of contracts, and effective environmental regulations.
Neoclassical economic theory believes that the understanding of the human behavior as a whole could be modeled as the rational choice of a representative agent and such a representative agent is assumed to be fully informed about the values of the relevant variables and parameters. This has been a commonly used way of modeling environmental problems.
Such a simplification allows us to focus on the most important question that we try to answer in this paper and give the reader some insight about the environmental choice problem.
To derive the result on how the price of environmental amenity affects the economic agent’s demand for it (or the level of pollution), we have first taken the price as given so that we can derive mathematical conditions for the economic agent’s optimal choices. After these are derived, we do let the price vary and see how it affects the result.
The utility function is quasi-concave ensures the satisfaction of the second-order conditions for a constrained maximum.
Or the real environmental amenity reservation price, \( R^{*} /P \) is the value of the real price so that environmental amenity is zero exactly, i.e., from eq. (6), \( E\left( {1,R^{*} /P,M} \right) = 0. \)
It may be written as the product of \( (RE)/M \) and \( (\partial E/\partial M)(M/E) \).
Differentiating the budget constraint with respect to M (and in so doing recognizing the dependence of C and E on M) yields the Engel aggregation condition \( P\left( {\partial C/\partial M} \right) + R\left( {\partial E/\partial M} \right) = 1 \).
Note that \( \omega \) here is different from the usual concept of Frisch’s money flexibility.
There appear to be two main reasons that richer societies give greater attention to environmental amenity. First, pollution damages can get higher priority after societies have completed basic investments in health and public environmental education. Second, higher-income societies have the capabilities to provide accessible public information about polluters, pollution damages and local environmental quality.
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Acknowledgments
We thank the two anonymous referees, the editors, and Youping Li for helpful comments and suggestions. This research was supported by the National Natural Science Foundation of China (71273092), the Humanity and Social Science Foundation of Ministry of Education of China (10YJCZH108), and the Fundamental Research Funds for Central Universities of China.
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Ma, S., Shi, L. The Micro-foundations of the Environmental Kuznets Curve. Fudan J. Hum. Soc. Sci. 7, 471–482 (2014). https://doi.org/10.1007/s40647-014-0036-9
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DOI: https://doi.org/10.1007/s40647-014-0036-9