Appendix: Public Bads, Growth, and Welfare

A1 Introduction

It is well recognized that because of the disexternalities of public bads such as pollutants, economic growth does not necessarily enhance welfare; however, the abatement behavior may offset such disexternalities. Indeed, abatement behavior may be so beneficial that it can raise overall welfare. In contrast, if the agent faces a corner solution and does not see a need for conducting abatement, this means that the agent significantly evaluates growth and hence notably gains from growth. Thus, a natural conjecture is that growth normally enhances welfare, especially for the poor agent, although the paradoxical possibility of immiserizing growth because of pollutants is not excluded.

In the real world, many poor countries are willing to have high growth even if it may raise the quantity of pollutants. Some economists, many of whom are associated with international organizations, advocate an international lump sum income transfer to developing countries in order to help introduce pollution abatement activities that improve the global environment. It is thus important to investigate the welfare implications of growth with pollutant emissions, which may deteriorate environmental quality, by explicitly incorporating offsetting abatement behavior.

Some papers have explored the offsetting effect of abatement behavior analytically using a framework of private provision of public goods (see, among others, Cornes and Sandler (1996); Sandler (1992); Shibata (2003); Cornes and Rubbelke (2012)). Shibata (2003) claimed that once we explicitly incorporate a public bad of damaging welfare, the optimizing abatement behavior results in a paradoxical result that economic growth cannot always enhance welfare. Using an extended version of Shibata’s analytical framework, we shall also show that the foregoing conjecture is not necessarily valid.

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