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

Martina Sartori ()

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

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.

Keywords: discount rate; environmental resources; income elasticity (search for similar items in EconPapers)
JEL-codes: O13 Q20 Q56 (search for similar items in EconPapers)
Date: 2012-12-27
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