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Positional goods, climate change and the social returns to investment

  • Leila Davis

    ()

    (University of Massachusetts Amherst)

  • Peter Skott

    ()

    (University of Massachusetts Amherst)

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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File URL: http://www.umass.edu/economics/publications/2011-24.pdf
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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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  1. 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.
  2. 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.
  3. 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.
  4. Marcel Fafchamps & Forhad Shilpi, 2006. "Subjective Welfare, Isolation, and Relative Consumption," Economics Series Working Papers GPRG-WPS-056, University of Oxford, Department of Economics.
  5. William D. Nordhaus, 2006. "The "Stern Review" on the Economics of Climate Change," NBER Working Papers 12741, National Bureau of Economic Research, Inc.
  6. 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.
  7. Olivier J. Blanchard, 2008. "The State of Macro," NBER Working Papers 14259, National Bureau of Economic Research, Inc.
  8. repec:cup:cbooks:9780521335614 is not listed on IDEAS
  9. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
  10. Armon Rezai & Duncan Foley & Lance Taylor, 2012. "Global warming and economic externalities," Economic Theory, Springer, vol. 49(2), pages 329-351, February.
  11. 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.
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