Nota di Lavoro, Fondazione Eni Enrico Mattei 44.2002
This paper examines a simple North-South growth model where negative externalities may contribute to reinforce economic growth. Agents' welfare depends on three goods in the model: leisure, a common access renewable natural resource (one in each hemisphere) and a non-storable consumption good. Production and consumption of the latter good deplete the renewable natural resource. To protect against such environmental deterioration, agents may increase their labor supply in order to produce an additional amount of the consumption good to be used as a substitute for the depleted natural resource. The consequent growth in production and consumption may generate a further depletion of the natural resource. This may lead to a self-enforcing growth process in a polluted world where individuals work and produce "too much" (i.e. more than socially optimal). We examine the choices of the two hemispheres using a two-population evolutionary game with transboundary pollution across hemispheres. Each agent chooses whether to work low or high. If an agent works low, she can consume the good only to satisfy basic needs (subsistence consumption). If the agent works high, she can consume an additional amount of the good as a substitute for the natural resource (substitution consumption). We assume that people who work high in the North can also have access to the Southern natural resource (e.g. they can afford a holiday in some developing country where natural resources are still relatively unpolluted), whereas the opposite is not true. We show that economic growth in the North and/or in the South may lead to stationary states that are Pareto dominated by states of the world with a lower level of production and consumption. Moreover, negative environmental externalities from the North to the South may foster growth in the South, which may have in turn feedback effects on growth in the North. Finally, we discuss possible welfare effects of transferring the environmental impact of Northern production to the South and show that such a policy may decrease welfare in both hemispheres.