Endowments, Preferences, Abatement and Voting: Microfoundations of Environmental Kuznets Curves

Will economic growth inevitably degrade the environment, throughout development? This paper presents a simple household-choice framework that emphasizes the tradeoff between pollution-causing consumption and pollution-reducing abatement expenditures. The framework yields a simple explanation for Environmental Kuznets Curves (EKCs, i.e. non-monotonic, upward-turning paths of environment while development continues) and facilitates analysis of household voting decisions that lead to public regulation of environmental externalities. Our sufficient conditions, more general than the literature, make clear that an asymmetric endowment (i.e. positive environmental quality but zero consumption at zero income) is sufficient for an EKC given standard preferences and a wide range of abatement technologies. The key is that the MRS leads the household to prefer not to abate (or to vote for whatever ‘abatement’ implies) at low income levels. Without the endowment, abatement technologies alone are insufficient for an EKC path. For a multi-agent setting with externalities, an analogous result is derived in which the chosen tax rate rises with income and environmental quality at first falls and later rises. JEL codes: D11, H41, O12, Q25