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Comparative Statics with Consumption Externalities

Author

Listed:
  • Peter Simmons
  • Emanuela Randon

Abstract

We consider the comparative statics of consumer demand when there are consumption externalities in one commodity between two individuals. We show that the externality can switch goods which would naturally be normal into inferior goods and as a result th e externality can also lead to Giffen goods. In addition the externality can transform complementarity relations between goods. Thus substitutes can become complements or vice versa once the feedback effects of the externality are taken into account. Next we consider the effect of externalities on Slutsky symmetry and negativity restrictions With consumption externalities there are generalised forms of such restrictions. We derive these both for the two individual case and for cases in which either there are two individuals but all goods may cause externalities or there is a single externality good but H individuals. We relate the generalised symmetry restrictions to the rank conditions of Browning and Chiappori. Finally we consider the effects of consumption externalities on consumer surplus analysis.

Suggested Citation

  • Peter Simmons & Emanuela Randon, "undated". "Comparative Statics with Consumption Externalities," Discussion Papers 03/06, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:03/06
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    References listed on IDEAS

    as
    1. Pollak, Robert A, 1977. "Price Dependent Preferences," American Economic Review, American Economic Association, vol. 67(2), pages 64-75, March.
    2. Ian Preston, 2000. "Departures from Slutsky Symmetry in Household Demand Models," Econometric Society World Congress 2000 Contributed Papers 1809, Econometric Society.
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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D6 - Microeconomics - - Welfare Economics
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

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