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Threshold Preferences and the Environment

  • Ingmar Schumacher
  • Benteng Zou

In this article we study the implication of thresholds in preferences. To model this we extend the basic model of John and Pecchenino (1994) by allowing the current level of environmental quality to have a discrete impact on how an agent trades off future consumption and environmental quality. In other words, we endogenize the semi-elasticity of utility based on a step function. We motivate the existence of the threshold based on research from political science, from arguments based on regulation and standards, cultural economics as well as ecological economics. Our results are that the location of the threshold determines both the potential steady states as well as the dynamics. For low (high) thresholds, environmental quality converges to a low (high) steady state. For intermediate levels it converges to a stable p-cycle, with environmental quality being asymptotically bounded below and above by the low and high steady state. We discuss implications for intergenerational equity and policy making. As policy implications we study shifts in the threshold. Our results are that, in case it is costless to shift the threshold, it is always worthwhile to do so. If it is costly to change the threshold, then it is worthwhile to change the threshold if the threshold originally was sufficiently low. Lump-sum taxes may lead to a development trap and should be avoided if there are uncertainties about the threshold or the effectiveness of the policy.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2013-015.

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Length: 44 pages
Date of creation: 15 May 2013
Date of revision:
Handle: RePEc:ipg:wpaper:2013-015
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  1. Lockwood, Michael, 1996. "Non-Compensatory Preference Structures In Non-Market Valuation Of Natural Area Policy," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 40(02), August.
  2. Danny Campbell & W. George Hutchinson & Riccardo Scarpa, 2007. "Incorporating Discontinuous Preferences into the Analysis of Discrete Choice Experiments," Working Papers in Economics 07/18, University of Waikato, Department of Economics.
  3. Gelso, Brett R. & Peterson, Jeffrey M., 2005. "The influence of ethical attitudes on the demand for environmental recreation: incorporating lexicographic preferences," Ecological Economics, Elsevier, vol. 53(1), pages 35-45, April.
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  12. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
  13. BRECHET, Thierry & PRIEUR, Fabien, 2009. "Can education be good for both growth and the environment?," CORE Discussion Papers 2009019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. 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.
  15. Bisin, Alberto & Verdier, Thierry, 1998. "On the cultural transmission of preferences for social status," Journal of Public Economics, Elsevier, vol. 70(1), pages 75-97, October.
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  17. Michael Lockwood, 1996. "Non‐Compensatory Preference Structures In Non‐Market Valuation Of Natural Area Policy," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 40(2), pages 85-101, 08.
  18. Spash, Clive L., 2000. "Ecosystems, contingent valuation and ethics: the case of wetland re-creation," Ecological Economics, Elsevier, vol. 34(2), pages 195-215, August.
  19. Marschak, T A, 1978. "On the Study of Taste Changing Policies," American Economic Review, American Economic Association, vol. 68(2), pages 386-91, May.
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