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Microfoundations for the Environmental Kuznets Curve: Invoking By-Production, Normality and Inferiority of Emissions

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  • Sushama Murty

    (Department of Economics, University of Exeter)

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    Abstract

    A by-production-cum-preference based approach is adopted to study the relation between national income and environmental quality under non-cooperative behaviour. While emission is an inferior good for richly endowed economies, it is a normal good for the developing economies. With increases in endowments, the marginal willingness to pay declines (respectively, increases) in the set of poorly (respectively, richly) endowed economies. Hence, for emissions, the income and substitution effects work in opposite directions. Abatement strategies include cleaning-up; decreases in and substitution between fuels of varying costs, emission, and energy intensities; and the diversion of capital from fuel-intensive to non-fuel intensive uses. Poorly (respectively, richly) endowed economies are characterized by weak (respectively, strong) environmental policies. Consequently, deteriorating abatement practices are adopted by the developing economies. The shape of the income-environmental quality graph depends on the relative strengths of income and substitution effects and the set of available abatement strategies. Both inverted U and N-shaped environmental Kuznets curves are possible. The latter arises due to stronger substitution effects and lower opportunity costs of fuel-intensive capital in the more richer of the richest economies.

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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1203.pdf
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    Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1203.

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    Date of creation: 2012
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    Handle: RePEc:exe:wpaper:1203

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    Keywords: environmental Kuznets curve; income and substitution effects; inferior good; normal good; by-production of emissions; returns to scale; abatement; inter-fuel substitution.;

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    1. Junko Doi & Kazumichi Iwasa & Koji Shimomura, 2009. "Giffen behavior independent of the wealth level," Economic Theory, Springer, vol. 41(2), pages 247-267, November.
    2. Murty, Sushama, 2010. "Externalities and fundamental nonconvexities: A reconciliation of approaches to general equilibrium externality modeling and implications for decentralization," Journal of Economic Theory, Elsevier, vol. 145(1), pages 331-353, January.
    3. Sushama Murty & R. Robert Russell & Steven B. Levkoff, 2011. "On modeling pollution-generating technologies," Discussion Papers 1101, Exeter University, Department of Economics.
    4. John, A & Pecchenino, R, 1994. "An Overlapping Generations Model of Growth and the Environment," Economic Journal, Royal Economic Society, vol. 104(427), pages 1393-1410, November.
    5. Selden Thomas M. & Song Daqing, 1994. "Environmental Quality and Development: Is There a Kuznets Curve for Air Pollution Emissions?," Journal of Environmental Economics and Management, Elsevier, vol. 27(2), pages 147-162, September.
    6. Sushama Murty, 2011. "The Theory of By-Production of Emissions and Capital-Constrained Non-Cooperative Nash Outcomes of a Global Economy," Discussion Papers 1110, Exeter University, Department of Economics.
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