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Environmental Damage and Price Taking Behaviour by Firms and Consumers

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  • Harold Houba
  • Hans Kremers

Abstract

Integrated assessment models lack a microeconomic foundation in modelling environmental damages to the economy. To overcome this, damage coefficients are incorporated in standard microeconomic models. Firms and consumers take both damages and prices as given. Demand, supply, profit and expenditure functions under damage coefficients are derived that allow easy implementation in applied economic models through appropriate price distortions related to such coefficients. For the consumer, Slutsky's equations are derived. The different speeds of equilibrium adjustment in economic and climate models is reconciled in the Recursive Equilibrium with Environmental Damages (REED). An exchange economy and Robinson Crusoe economy illustrate our approach.

Suggested Citation

  • Harold Houba & Hans Kremers, 2009. "Environmental Damage and Price Taking Behaviour by Firms and Consumers," Discussion Papers of DIW Berlin 878, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp878
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    References listed on IDEAS

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    1. Richard Tol, 2002. "Estimates of the Damage Costs of Climate Change. Part 1: Benchmark Estimates," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 21(1), pages 47-73, January.
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    5. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    6. Samuel Fankhauser & Richard Tol & DAVID Pearce, 1997. "The Aggregation of Climate Change Damages: a Welfare Theoretic Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 10(3), pages 249-266, October.
    7. Brock, William A. & de Zeeuw, Aart, 2002. "The repeated lake game," Economics Letters, Elsevier, vol. 76(1), pages 109-114, June.
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    Cited by:

    1. Astrid KRENZ, 2010. "Modeling the Interaction Between Industries and Services Sectors´ Agglomeration in the European Union," EcoMod2010 259600098, EcoMod.
    2. Hirte, Georg & Nitzsche, Eric & Tscharaktschiew, Stefan, 2018. "Optimal adaptation in cities," Land Use Policy, Elsevier, vol. 73(C), pages 147-169.

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    More about this item

    Keywords

    environmental damage; substitution effects; income effects; Slutsky's equations; equilibrium;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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