Environmental depletion, defensive consumption and negative externalities

This paper analyses economic dynamics in a context in which the production and consumption choices of economic agents generate environmental degradation. Agents can defend themselves from environmental degradation by increasing the production and consumption of output, which is assumed to be a (perfect) substitute for environmental quality. We consider the cases in which agents can coordinate their actions or not, and we show that if the dynamics is conditioned by negative externalities (so that there is no coordination), then a self-reinforcing mechanism may occur leading to production and consumption levels higher than the socially optimal ones. A complete analysis of the dynamics and of the welfare properties of the stationary states is provided.