Optimal Consumption of Polluting and Non-Polluting Goods: The Role of Habits

27 Pages Posted: 6 Jan 2016 Last revised: 10 Jun 2016

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: January 5, 2016

Abstract

We present a basic exogenous growth model with two consumption goods that differ as regards their contributions to environmental pollution. Allowing for habit formation of the polluting good, we show under which conditions habit formation raises the consumption of the clean good relative to the dirty one in the competitive economy. Further, we demonstrate when habit formation generates a lower steady-state pollution stock compared to the situation without habits. Finally, we determine the Pigou tax rates and we illustrate that the social optimum may imply a higher steady-state pollution than the competitive economy if the habit formation is sufficiently strong.

Keywords: environmental pollution, clean and dirty consumption, habits, optimal control

JEL Classification: Q50, H23, C61

Suggested Citation

Greiner, Alfred, Optimal Consumption of Polluting and Non-Polluting Goods: The Role of Habits (January 5, 2016). Bielefeld Working Papers in Economics and Management No. No. 01-2016, Available at SSRN: https://ssrn.com/abstract=2711213 or http://dx.doi.org/10.2139/ssrn.2711213

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

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