Social Status Preferences

Taking the variety expansion model with pollution emissions and emissions trading in Chap. 6 , the preference of households for leisure time is replaced by a preference for social status. Households perceive utility from social status when they have more personal assets than the average assets in society. A reduction in the total emission allowances reduces pollution emissions through pollution abatement goods and affects the economic growth rate through the marginal rate of substitution (MRS) for assets and consumption. This is known as the substitution effect and is dependent on the crowding-out effect and the resource reallocation effect. The complementary impact of the crowding-out effect on the substitution effect leads to multiple steady states. In a high steady state, under specific conditions, the resource reallocation effect dominates the crowding-out effect, hence, the reduction in emission allowances improves welfare by growing the economy through the substitution effect. However, in a low steady state, which is a poverty trap, environmental policy reduces the economic growth rate and has a non-monotonic effect on welfare. When there is no social status preference, status goods are consumer goods, in the lab-equipment model, the growth-enhancing effect of emission allowances disappears.