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Title:Environmental damage and price taking behaviour by firms and consumers PDF Logo
Authors:Houba, Harold
Kremers, Hans
Issue Date:2009
Series/Report no.:Discussion papers // German Institute for Economic Research 878
Abstract:Integrated assessment models lack a microeconomic foundation in modelling environmental damages to the economy. To overcome this, damage coefficients are incorporated in standard microeconomic models. Firms and consumers take both damages and prices as given. Demand, supply, profit and expenditure functions under damage coefficients are derived that allow easy implementation in applied economic models through appropriate price distortions related to such coefficients. For the consumer, Slutsky's equations are derived. The different speeds of equilibrium adjustment in economic and climate models is reconciled in the Recursive Equilibrium with Environmental Damages (REED). An exchange economy and Robinson Crusoe economy illustrate our approach.
Subjects:Environmental damage
substitution effects
income effects
Slutsky's equations
equilibrium
JEL:Q41
Q51
Q52
D11
D12
D51
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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