Household Production, the Bundling of Services and Degradation, and Non-monotonic Environmental Engel Curves

Abstract

In this paper, we step back from the literature on Kuznets curves (inverted-U relationships at the aggregate level between various indicators of environmental degradation and per-capita income) to consider one possible component of such relationships, i.e. the link between household income and household choices that impact upon the environment. Our approach is distinguished by explicit modeling of a household-level mechanism linking income to changes in environmental quality. Two facts are emphasized: (1) a household can not directly purchase environmental quality; and (2) a household starts with a positive endowment of environmental quality, which is degraded through consumption. We propose a household production model, in which households purchase marketed commodities that bundle a non-environmental services, with a bad, environmental degradation. We show that even if the environment is a normal good, household substitution towards less environmentally degrading marketed commodities, combined with natural constraints on the household's shifts between marketed commodities, could produce a non-monotonic relationship between household income and environmental quality, i.e. a non-monotonic environmental Engel curve.