Voluntary Provision of Public Goods for Bads: A Theory of Environmental Offsets

23 Pages Posted: 30 Nov 2007 Last revised: 13 Oct 2022

See all articles by Matthew J. Kotchen

Matthew J. Kotchen

Yale University; National Bureau of Economic Research (NBER)

Date Written: November 2007

Abstract

This paper examines voluntary provision of a public good that is motivated, in part, to compensate for other activities that diminish the public good. Markets for environmental offsets, such as those that promote carbon neutrality to minimize the impact of climate change, provide an increasingly salient example. An important result, related to one shown previously, is that mean donations to the public good do not converge to zero as the economy grows large. Other results are new and comparable to those from the standard model of a privately provided public good. The Nash equilibrium is solved explicitly to show how individual direct donations and net contributions depend on wealth and heterogenous preferences. Comparative static analysis demonstrates how the level of the public good and social welfare depend on the technology, individual wealth, and an initial level of the public good. Application of the model in an environmental context establishes a starting point for understanding and making predictions about markets such as those for carbon offsets.

Suggested Citation

Kotchen, Matthew J., Voluntary Provision of Public Goods for Bads: A Theory of Environmental Offsets (November 2007). NBER Working Paper No. w13643, Available at SSRN: https://ssrn.com/abstract=1037167

Matthew J. Kotchen (Contact Author)

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