Relative Consumption and Resource Extraction

38 Pages Posted: 11 Jan 2009

See all articles by Francisco Alvarez-Cuadrado

Francisco Alvarez-Cuadrado

McGill University - Department of Economics

Ngo Van Long

McGill University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 1, 2008

Abstract

This paper presents a simple model of resource extraction where preferences are household's preferences depend on relative consumption levels. We identify two dimensions along which consumption externalities distort the efficient extraction of resources: (i) the static trade-off between consumption and effort, and (ii) the dynamic trade-off between current and future consumption. In general, households over-exploit the natural resource stocks, resulting in steady state stocks lower than the efficient stocks of resources that would be chosen by a benevolent central planner. We propose a tax mechanism to induce the first best outcome.

Keywords: relative consumption, relative income hypothesis, permanent income hypothesis

JEL Classification: D62, Q20, Q50

Suggested Citation

Alvarez-Cuadrado, Francisco and Van Long, Ngo, Relative Consumption and Resource Extraction (October 1, 2008). CIRANO - Scientific Publications 2008s-27, Available at SSRN: https://ssrn.com/abstract=1324685 or http://dx.doi.org/10.2139/ssrn.1324685

Francisco Alvarez-Cuadrado

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

Ngo Van Long (Contact Author)

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada
514-398-4850 (Phone)
514-398-4938 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany