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Positional goods, climate change and the social returns to investment

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  • Leila Davis

    ()
    (University of Massachusetts Amherst)

  • Peter Skott

    ()
    (University of Massachusetts Amherst)

Abstract

The economic analysis of global warming is dominated by models based on optimal growth theory. This approach can generate biases in the presence of positional goods and status effects. We show that by ignoring these direct consumption externalities, integrated assessment models overestimate the social return to conventional investment and underestimate the optimal amount of investment in mitigation. Empirical evidence on the influence of relative consumption on utility suggests that the bias could be quantitatively significant. Our results from a simple survey support this conclusion. JEL Categories: Q13, I3, E1

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Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2011-24.

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Date of creation: Oct 2011
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Handle: RePEc:ums:papers:2011-24

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Keywords: representative agent; consumption externalities; positional goods; relative consumption; welfare; global warming; discount rates.;

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  1. Armon Rezai & Duncan Foley & Lance Taylor, 2012. "Global warming and economic externalities," Economic Theory, Springer, vol. 49(2), pages 329-351, February.
  2. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
  3. Marcel Fafchamps & Forhad Shilpi, 2006. "Subjective Welfare, Isolation, and Relative Consumption," Economics Series Working Papers GPRG-WPS-056, University of Oxford, Department of Economics.
  4. Ng, Y.K. & Wang, J., 1993. "A Case for Cardinal Utility and Aritrary Choice of Commodity Units," Papers 93-26, New South Wales - School of Economics.
  5. Frank Ackerman, Elizabeth A. Stanton, Ramón Bueno, 2010. "CRED: A New Model of Climate and Development," Working Papers 96, United Nations, Department of Economics and Social Affairs.
  6. Blanchflower, David G. & Oswald, Andrew J., 2001. "Well-Being Over Time in Britain and the USA," The Warwick Economics Research Paper Series (TWERPS) 616, University of Warwick, Department of Economics.
  7. Olivier Blanchard, 2009. "The State of Macro," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 209-228, 05.
  8. William D. Nordhaus, 2006. "Principles of National Accounting For Nonmarket Accounts," NBER Chapters, in: A New Architecture for the U.S. National Accounts, pages 143-160 National Bureau of Economic Research, Inc.
  9. William D. Nordhaus, 2006. "The "Stern Review" on the Economics of Climate Change," NBER Working Papers 12741, National Bureau of Economic Research, Inc.
  10. Debreu,Gerard Introduction by-Name:Hildenbrand,Werner, 1986. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521335614, April.
  11. Richard Howarth, 2000. "Climate Change and the Representative Agent," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(2), pages 135-148, February.
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Cited by:
  1. Peter Skott & Leila Davis, 2011. "Distributional biases in the analysis of climate change," UMASS Amherst Economics Working Papers 2011-22, University of Massachusetts Amherst, Department of Economics.

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