Love of variety and the welfare effects of trade in renewable resources

Abstract

We analyze welfare effects of trade in renewable resources, which is induced by consumer love of variety in resource consumption. We model two countries, one being relatively wealthy in labor and capital, the other one being relatively resource abundant. For open-access resources, we show that trade freeness benefits the country that is wealthy in labor and capital, as it improves access to a larger variety of resources, especially to those of the resource-abundant country. The resource-abundant country also benefits from improved access to variety, but due to the increased resource demand and resulting overuse, this country’s welfare may depend on trade freeness in a non-monotonic fashion. We derive conditions such that welfare first decreases and then increases when trade freeness varies from autarky to costless trade. In direct comparison, autarky may generate higher welfare than costless trade only under restrictive conditions, in particular if endowments are very asymmetric and if the love of variety effect is weak. We also consider resource harvesting under private property rights and show that only for a sufficiently low discount rate the welfare increase from trade freeness in the resource-abundant country is sustainable.