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Environmental Damage and Price Taking Behaviour by Firms and Consumers

Harold Houba () and Hans Kremers ()

No 878, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Integrated assessment models lack a microeconomic foundation in modelling environmental damages to the economy. To overcome this, damage coefficients are incorporated in standard microeconomic models. Firms and consumers take both damages and prices as given. Demand, supply, profit and expenditure functions under damage coefficients are derived that allow easy implementation in applied economic models through appropriate price distortions related to such coefficients. For the consumer, Slutsky's equations are derived. The different speeds of equilibrium adjustment in economic and climate models is reconciled in the Recursive Equilibrium with Environmental Damages (REED). An exchange economy and Robinson Crusoe economy illustrate our approach.

Keywords: environmental damage; substitution effects; income effects; Slutsky's equations; equilibrium (search for similar items in EconPapers)
JEL-codes: Q41 Q51 Q52 D11 D12 D51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env and nep-res
Date: 2009
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