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Time Preference and Environmental Resources when the Environment is a Luxury Good

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  • Martina SARTORI

Abstract

This paper builds upon Smulders (2007), who analyzes a model of economic growth with renewable resource dynamics, to study how society's discount rate and the inter-temporal optimization process affect the long-run stock of an environmental resource. He compares a Green Golden Rule (GGR) and an intertemporal optimization problem à la Ramsey (OPR). Despite the fact that steady state utility is maximized in the GGR, Smulders finds that a high discount rate may still bring about a higher level of environmental quality/quantity in the OPR. In this setting, we introduce a time-varying preference parameter for environmental amenities in the utility function. Our aim is to study how the steady state level of the environmental resource may vary when environmental preferences change over time, in particular, when the marginal utility of the environment increases with income. We introduce this \luxury good nature" of the environment into the model by replacing the Cobb-Douglas (CD) specification for the instantaneous utility function with a LES - Linear Expenditure System. We find that an initial low preference for the environment does not prevent reaching the same long run level of environmental resource as in Smulders. We also provide a qualitative and quantitative analysis of the transient model dynamics.

Suggested Citation

  • Martina SARTORI, 2012. "Time Preference and Environmental Resources when the Environment is a Luxury Good," Departmental Working Papers 2012-25, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    • Handle: RePEc:mil:wpdepa:2012-25
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    File URL: http://wp.demm.unimi.it/files/wp/2012/DEMM-2012_025wp.pdf
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    References listed on IDEAS

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    2. Flores, Nicholas E. & Carson, Richard T., 1997. "The Relationship between the Income Elasticities of Demand and Willingness to Pay," Journal of Environmental Economics and Management, Elsevier, vol. 33(3), pages 287-295, July.
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    More about this item

    Keywords

    discount rate; environmental resources; income elasticity;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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