The costs of social and environmental degradation in affluent economies

Individuals’ attempts to defend from the deterioration of common goods, such as natural and social capital, stimulate defensive growth, that is new economic activity driven by private solutions to collective problems. In this paper, we provide a first estimate of the value of defensive expenditures, that is of the individual consumption needed to protect subjective well-being against collective problems. We conduct a regression analysis of life satisfaction on aggregate consumption levels and various social and environmental externalities (which we refer to as "bads"). Using a compensating differentials approach, we estimate the monetary valuation of social and environmental disruption for which no market price exists. Our estimates indicate that the consumption needed to defend against collective problems is worth nearly a quarter of actual individual consumption. In terms of national income, this is equivalent to nearly half Gross Domestic Product per capita in affluent economies. Defensive consumption stimulates economic growth, however, in so far as the equivalent of nearly half of growth is defensive, its expansion does not reflect true progress.