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Endowments, preferences, technologies and abatement: growth-environment microfoundations

Alexander Pfaff, Shubham Chaudhuri, Howard L.M. Nye

Abstract: Will economic growth inevitably degrade the environment, throughout development? We present a household-level framework emphasizing the tradeoff between consumption that causes pollution and pollution-reducing abatement. Our model provides a simple explanation for upward-turning, non-monotonic paths of environmental quality during economic growth. Its innovation is sufficient conditions that simultaneously address preferences and technologies. With standard preferences, an asymmetric endowment (i.e., at zero income, consumption is also zero but environmental quality is positive) leads low-income households not to abate, and further this condition is sufficient for an EKC for a wide range of abatement technologies. Without such an endowment, however, even strong economies of scale in abatement are, on their own, insufficient for an EKC.