Transferring Negative Externalities: Feedback Effects of Self-Protection Choices in a Two Hemispheres Model

Abstract

In this paper we analyze an economy in which self–protection choices made by economic agents to face environmental degradation generate environmental negative externalities on other agents. By self–protection choices we mean choices that agents may do to protect themselves against some form of social degradation (e.g. crimes, lack of leisure, depletion of social capital) or environmental degradation (air and water pollution, loss of biodiversity, growing scarcity of green areas, etc.). The notion of self–protection choices is not new in the literature. Hirsch (1976) was the first to introduce the concept of defensive consumption, that is, consumption induced by a growth in negative externalities. The notion originally proposed by Hirsch concerned a wider set of choices than those induced by environmental deterioration. The concept, however, has become particularly popular in the environmental literature where there is a major debate on how the Gross National Product as a measure of welfare should be corrected to take into account defensive expenditures and environmental depletion.1 There exist many alternative classifications of environmental defensive expenditures generated by self-protection choices (e.g. Hueting, 1980; Leipert, 1989; Leipert and Simonis, 1989). Among them, a particularly interesting taxonomy is the one proposed by Bird (1987) and Shogren and Crocker (1991) who distinguish between environmental self–protection choices that generate negative externalities and those that produce positive externalities. The former choices transfer the environmental damage to other agents, while the latter filter it, transferring the reduction of the environmental damage to other agents. In what follows we will focus on the former category since it appears to be the larger one (cf. Shogren and Crocker, 1991).