Article

Status effects and environmental externalities

Environmental Studies Program, University of California, Santa Cruz, CA 95064, USA
Ecological Economics (Impact Factor: 2.52). 02/1996; 16(1):25-34. DOI: 10.1016/0921-8009(95)00076-3
Source: RePEc

ABSTRACT This paper examines a static, competitive economy where the production of a consumption good generates pollution that adversely affects human welfare. Preferences are defined over consumption, leisure, pollution, and economic status. Each person's status increases with her own consumption, but decreases with the average consumption of society. The achievement of a Pareto efficient resource allocation requires a consumption tax to offset the incentive to overconsume in the pursuit of enhanced status. In contrast with standard prescriptions, the efficient pollution tax generally exceeds the sum of individuals' marginal willingness to pay for pollution abatement. These findings remain unaltered when preferences are modified to incorporate altruistic concern for others' well-being. Altruism, however, suggests a potential role for government intervention to achieve a desirable (i.e., Pareto efficient) distribution of welfare between individuals.

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