Environmental Damage and Price Taking Behaviour by Firms and Consumers

Tinbergen Institute Discussion Paper No. TI 09-029/1

DIW Berlin Discussion Paper No. 878

27 Pages Posted: 8 Apr 2009 Last revised: 17 Nov 2013

See all articles by Harold Houba

Harold Houba

VU University Amsterdam, Department of Econometrics; VU University Amsterdam, Tinbergen Institute

Hans Kremers

affiliation not provided to SSRN

Date Written: April 7, 2009

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, Slutky's equations, equilibrium

JEL Classification: Q41, Q51, Q52, D11, D12, D51

Suggested Citation

Houba, Harold E. D. and Houba, Harold E. D. and Kremers, Hans, Environmental Damage and Price Taking Behaviour by Firms and Consumers (April 7, 2009). Tinbergen Institute Discussion Paper No. TI 09-029/1, DIW Berlin Discussion Paper No. 878, Available at SSRN: https://ssrn.com/abstract=1374291 or http://dx.doi.org/10.2139/ssrn.1374291

Harold E. D. Houba (Contact Author)

VU University Amsterdam, Department of Econometrics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

HOME PAGE: http://personal.vu.nl/h.e.d.houba/

VU University Amsterdam, Tinbergen Institute ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

HOME PAGE: http://personal.vu.nl/h.e.d.houba/

Hans Kremers

affiliation not provided to SSRN ( email )

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