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Environmental defensive expenditures, expectations and growth

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Abstract

Nowadays many agents meet defensive expenditures to protect themselves against environmental deterioration. Such expenditures may contribute to support economic growth. Environmental degradation, in fact, may induce agents to work harder to replace depleted environmental goods with substitute goods. The consequent rise in the activity level may further deplete the environment, worsening the agents’ expectations on the future environmental quality and increasing their demand for substitute goods. To examine this issue, we adopt a simple model in which agents formulate expectations on the future environment that can be right or wrong and examine how such expectations influence capital accumulation and growth.

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Notes

  1. As Um et al. (2002) pointed out, if water supply was polluted in the past, people keep on perceiving low quality levels for tap water even if data show that current pollution levels are actually much lower. See Harrington et al. (1989), Abdalla et al. (1992), Laughland et al. (1996), Traore et al. (1999), for analyses of households’ averting activities and costs in response to water quality degradation.

  2. Several recent epidemiological studies (e.g., Friedman et al., 2001; Kunzli et al., 2000; Pope et al., 2002) confirm the existence of a strong correlation between urban concentration of air pollutants (ozone and PM10) and acute respiratory diseases in different countries.

  3. We are fully aware that other reasons may also contribute to the agents’ decision to leave the city-center, but the search for higher environmental conditions and a better life-style often play an important role in this choice.

  4. It has been estimated (National Geographic, 2001) that the urban sprawl causes a loss of about 485 thousands hectares of agricultural land a year, and up to 800 thousands hectares if we add the loss of forests and uncultivated lands. See Johnson (2001) for a thorough survey of the literature on the environmental consequences of the urban sprawl.

  5. The increasing level of activity and the consequent lack of leisure that many people experience in most developed countries induce, for instance, many families to rent a colf or a baby-sitter. To afford these additional expenditures, however, people may be compelled to work (and produce) even more, which may further reduce the time that they have at disposal for the family.

  6. Following a standard assumption in the environmental literature (e.g., Becker, 1982; Mäler, 1974), we assume that the environmental quality is measured by the stock of the environmental capital that yields a flow of services proportional to that stock. This allows a broad interpretation of the environmental stock E that can be seen both as the amount of natural resources and raw materials at disposal and as a proxy of the environmental quality of the ecosystem taken into account.

  7. See, for instance, Bennett and Farmer (2000) for a discussion of the implications of a similar utility function. We have modified that function by introducing the environmental variable E among the preferences of the representative agent.

  8. Notice that from the specification of the utility function i follows that none of the choice variables can be equal to zero.

  9. Notice that the present case could also be used to describe the choices of the social planner of a small economy who regards the impact of her policy on the global environment as insignificant, taking therefore future environmental quality as exogenously given by the policies implemented in the rest of the world.

  10. The first-order conditions are both necessary and sufficient for the existence of a solution. The same conditions can also be obtained by replacing r t · k t +w t · l t =k α t l 1-α t (t=0,1) into (8) and maximizing the objective function with respect to l 0, l 1, k 1.

  11. Notice that the chosen parameter values imply: (i) equal share of income accruing to labor and capital (α=0.5); (ii) a constant elasticity of substitution between consumption at any two points in time (being 1/β =0.5) that measures how much agents are willing to allow consumption to vary over time; (iii) a very high discount factor (γ being close to its upper limit). Observe that if we can show the existence of a welfare-reducing growth path when people care a lot for the future (assumption iii), a fortiori the same result will apply when people do not give much importance to the future environmental conditions. Similar results emerged from the analysis when adopting different sets of parameter values. Results are available from the authors upon request.

  12. We have omitted from the figures the variations of total output (Y 0 and Y 1) for space reasons. Notice, however, that the latter equals consumption in the second period (i.e. Y 1=c 1), therefore its evolution can be obtained simply by observing the path of c 1. As to Y 0, it can be obtained as the sum of the curves c 0 and k 1.

  13. The latter values imply a unit regeneration rate of the environmental resource (δ=1) and a very low environmental impact of aggregate production (ε being close to its lower limit). Notice that if we can show the existence of a welfare-reducing growth path when the production process causes little damages to the environment, a fortiori the same result will apply when production has a large negative ecological impact.

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Acknowledgments

The authors would like to thank two anonymous referees for helpful comments and suggestions. The usual disclaimer applies.

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Authors and Affiliations

  1. Department of Economics, University of Sassari, Sassari, Italy

    A. Antoci & P. Russu

  2. Department of Quantitative Methods and Economic Theory, University of Chieti-Pescara, Pescara, Italy

    S. Borghesi

  3. Department of Economics, University of Sassari, Via Torre Tonda 34, 07100, Sassari, Italy

    A. Antoci

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Correspondence to A. Antoci.

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Antoci, A., Borghesi, S. & Russu, P. Environmental defensive expenditures, expectations and growth. Popul Environ 27, 227–244 (2005). https://doi.org/10.1007/s11111-006-0019-0

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