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Environmental Damage and Price Taking Behaviour by Firms and Consumers

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  • Harold Houba

    (VU University Amsterdam)

  • Hans Kremers

    (Deutsches Institut f�r Wirtschaftsforschung (DIW))

Abstract

Integrated assessment models lack a microeconomic foundation in modelling environmental damages to the economy. To overcome this, damage coefficients are incorporated in standard microeconomic models. Firms and consumers take both damages and prices as given. Demand, supply, profit and expenditure functions under damage coefficients are derived that allow easy implementation in applied economic models through appropriate price distortions related to such coefficients. For the consumer, Slutsky's equations are derived. The different speeds of equilibrium adjustment in economic and climate models is reconciled in the Recursive Equilibrium with Environmental Damages (REED). An exchange economy and Robinson Crusoe economy illustrate our approach.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-029/1.

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Date of creation: 07 Apr 2009
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Handle: RePEc:dgr:uvatin:20090029

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Related research

Keywords: environmental damage; substitution effects; income effects; Slutky's equations; equilibrium;

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  1. Victor Ginsburgh & Michiel Keyzer, 2002. "The structure of applied general equilibrium models," ULB Institutional Repository 2013/3313, ULB -- Universite Libre de Bruxelles.
  2. Richard Tol, 2002. "Estimates of the Damage Costs of Climate Change. Part 1: Benchmark Estimates," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(1), pages 47-73, January.
  3. Samuel Fankhauser & Richard Tol & DAVID Pearce, 1997. "The Aggregation of Climate Change Damages: a Welfare Theoretic Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 10(3), pages 249-266, October.
  4. Claudia Kemfert & Hans Kremers, 2009. "The Cost of Climate Change to the German Fruit Vegetation Sector," Discussion Papers of DIW Berlin 857, DIW Berlin, German Institute for Economic Research.
  5. Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, vol. 23(1), pages 17-34, January.
  6. Brock, W.A. & Zeeuw, A.J. de, 2002. "The repeated lake game," Open Access publications from Tilburg University urn:nbn:nl:ui:12-90313, Tilburg University.
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