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Limit Cycles Under a Negative Effect of Pollution on Consumption Demand: The Role of an Environmental Kuznets Curve

Stefano Bosi () and David Desmarchelier ()
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Stefano Bosi: University of Evry

Environmental & Resource Economics, 2018, vol. 69, issue 2, 343-363

Abstract: Abstract Since Heal (Explorations in natural resource economics. The Johns Hopkins University Press for Resources for the Future, Baltimore, 1982), there is a theoretical consensus about the occurrence of limit cycles (through a Hopf bifurcation) under a positive effect of pollution on consumption demand (compensation effect) and about the impossibility under a negative effect (distaste effect). However, recent empirical evidence advocates for the relevance of distaste effects. Our paper challenges the conventional view on the theoretical ground and reconciles theory and evidence. The environmental Kuznets curve (EKC) (pollution first increases in the capital level then decreases) plays the main role. Indeed, the standard case à la Heal (limit cycles only under a compensation effect) only works along the upward-sloping branch of the curve while the opposite (limit cycles only under a distaste effect) holds along the downward-sloping branch. Welfare effects of taxation also change according to the slope of the EKC.

Keywords: Pollution; Environmental Kuznets curve; Hopf bifurcation; Ramsey model (search for similar items in EconPapers)
JEL-codes: E32 O44 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Limit Cycles under a Negative Effect of Pollution on Consumption Demand: The Role of an Environmental Kuznets Curve (2015) Downloads
Working Paper: Limit cycles under a negative effect of pollution on consumption demand: the role of an environmental Kuznets curve (2015) Downloads
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