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We analyze growth dynamics in an economy where the well-being of economic agents depends on three goods: leisure, a free access environmental good and a private good that can be consumed as a substitute for the environmental resource. The processes of production and consumption of the private good by each agent impose negative externalities on other agents through the depletion of the environmental good. This paper shows that, in such context, the existence of private substitutes for environmental goods may fuel an undesirable economic growth process. This process is driven by the continuous increase in agents' needs for private consumption generated by the progressive reduction in free consumption of the environmental good.

The impact on individuals' well-being of environmental deterioration caused by the processes of economic growth in industrialized countries is evident. Less known are some undesired effects of environmental deterioration acting as a factor that conditions individuals’ choices. Environmental degradation encourages behavior perceived as rational at an individual level, that is to say capable of increasing personal well-being; however, at an aggregate level, such behavior may lead to a reduction in collective well-being. We can outline the mechanism from which these undesired effects may stem as follows. In order to defend themselves from environmental degradation, economic agents make self-protection choices by utilizing certain private goods. The production and consumption of such goods further aggravates environmental degradation, and stimulates yet more production and consumption of goods used as a means of self-protection. The result may be a self-enforcing vicious circle that produces undesirable economic growth, in other words economic growth coupled – paradoxically – with a reduction in individuals' well-being. In this paper, we aim to analyze the possible scenarios that the above-described mechanism may generate. In particular, we study growth dynamics in an economy where only one private good is produced, a good that may be consumed as a substitute for a free access renewable environmental good or to satisfy needs different from those satisfied by the environmental resource. The production and consumption processes of the private good deteriorate the environmental resource; such deterioration (ceteris paribus) induces agents to increase their labor input in the production process of the private good, in order to produce and consume it in higher quantities as a substitute for the environmental good. Since economic agents take as exogenously given the aggregate negative impact of economic activity on the environmental good, production of the private good (which is assumed as non-storable) generates negative externalities. However, the production process of the private good generates also positive externalities via technical progress (which is assumed to be a pure public good) generated by a learning-by-doing mechanism of accumulation of knowledge. In this context, the negative externalities deriving from the substitution process described above may result in better exploitation of positive externalities by agents and drive the economy away from a poverty trap. However, we show also that growth paths may exist along which the (cumulative) effect of positive externalities is unable to counterbalance the effect of negative externalities. In other words, the economy may approach a stationary state characterized by relatively high consumption of private goods and technical progress, which is Pareto-dominated by other stationary states with lower private consumption and technical progress. In this case, economic growth is the consequence of a coordination failure, and the existence of private substitutes for environmental goods generates socially undesirable effects. The idea that negative externalities deriving from economic growth may fuel the growth process through the enforcement of defensive consumption has been discussed in economic literature at least since Hirsch's famous work (1976). The idea that environmental negative externalities can be an engine of undesirable economic growth was first introduced in a mathematical model by Antoci (1996) and Antoci and Bartolini (1997)1 who analyzed the selection process of labor inputs and of consumption patterns in an evolutionary game context without accumulation of assets. Similar results were obtained by Bartolini and Bonatti (2002) in a neoclassical model without capital accumulation and in Antoci et al. (2005a), where the role played by economic agents’ expectations (that can be right or wrong) on the future environmental quality in determining labor input and capital accumulation was studied via a simple two-periods static model. Finally, Bartolini and Bonatti (2003) and Antoci et al., 2005b and Antoci et al., 2007a have analyzed neoclassical models with perfect foresight and physical capital accumulation2. These works focus only on local stability analysis of stationary states due to analytical complexity of the proposed models; differently from these contributions in this research line, our model allows a full description of economic dynamics and an easy comparison between the dynamics with and without substitutability between the environmental and the private goods. Furthermore, it shows that environmental negative externalities can contribute to better exploit the positive externalities generated by the production process. As a matter of fact, by inducing the agents to work and consume more, negative externalities can accelerate technical progress, leading the economy in some (particularly virtuous) cases on a Pareto-improving path. In our model and in the above cited literature, a low endowment of natural resources stimulates economic growth. Several recent works (the literature on the curse of natural resources) have focused on various mechanisms through which the scarcity of environmental resources may stimulate growth processes (see e.g. Matsuyama, 1992, Sachs and Warner, 1995, Sachs and Warner, 1999, Sachs and Warner, 2001, Gylfason et al., 1999, Gylfason, 2001, Auty, 2001a, Auty, 2001b, Auty, 2007, Papyrakis and Gerlagh, 2007 and Hodler, 2006). Most current explanations for the curse of natural resources have a crowding-out logic: natural resources crowd-out activity x; activity x drives growth; therefore, natural resources harm growth. For example, Sachs and Warner, 1995 and Sachs and Warner, 1999 identify x with traded-manufacturing activities and the crowding-out mechanism is the following: an increase of natural resources endowment may create an increase of demand for non-traded products driving up their prices. If these non-traded goods are inputs in the production process of traded-goods (e.g. labor), the increase of non-traded goods’ prices reduces profits in the traded good sector (which sell its products on international markets at relatively fixed prices). The consequent decline of the traded activities inhibits economic growth. Matsuyama (1992) identifies x with the industrial sector; in particular, he analyses an economy with two sectors – the agricultural sector and the industrial one – in which the scarcity of natural resources is represented by low productivity in the agricultural sector. Economic agents react to the low productivity of the agricultural sector by increasing labor input within the industrial sector, where an accumulation process of knowledge driven by a learning-by-doing mechanism works3. In these studies, well resource endowed countries have been identified according to per capita land, primary export share or abundance of point resources (mining, oil)4 while in our model the environmental good is a pure public good which is a final good and not an input. Furthermore, in the literature on the curse of natural resources, economic growth is always desirable; that is, an increase in the activity level of sector x always leads to an increase in the well-being of economic agents. In our model, the development of sector x (production of private goods used as substitutes for environmental goods5) generates negative externalities which may lead to an undesirable expansion of sector x. The paper is organized as follows. Sections 1 and 2 deal with environmental self-protection choices; in sections 3, 4 and 5 we present the model; in sections 6, 7 and 8 we analyze it. Finally, Section 9 concludes the paper.

The general prediction of the model is that the higher the environmental impact γ and the lower the endowment E̅ of the environmental good are, the higher the economy's technical progress and consumption level will be. An exogenous reduction in E̅ or an exogenous increase in γ may generate an increase of the aggregate product and of the level of K. Economic growth is fueled by the increase in the work motivation of economic agents, as a consequence of the gradual deterioration of the environmental resource. Such deterioration induces agents to modify their consumption patterns, and concentrate more and more on the consumption of private and expensive goods, rather than free access environmental goods. The analysis of the model has shown that the outcome of this economic growth mechanism may be undesirable, and call for coordination by the Public Administration. What guidelines should the Public Administration follow in planning environmental policies? Public administrators should ask themselves the following question: how many free access leisure opportunities are available to individuals? The question becomes particularly relevant when we consider the issue of managing large urban centers. The negative environmental effects of interaction between individuals are particularly evident in environments with high human density and high production density such as urban areas, the very places in which the majority of self-protection choices are made. Cities have the advantage of offering a great variety of leisure opportunities; nevertheless, they also have the disadvantage that almost nothing on offer is free of charge. This damages weaker categories such as the elderly, children, and low-income families. Traffic bans at weekends designed to reduce urban pollution are one example of an extremely effective public measure that induces citizens to change their consumption patterns. By reducing atmospheric and noise pollution, such measures considerably increase the supply of free access places available to citizens for their leisure time and hence help to reduce undesired self-protection consumption. Another important area of intervention is management of coastal areas, the objective of which should be not only a reduction in the degradation of ‘nearby’ bathing areas but also a reduction in the cost of access to such areas. In fact, it is appropriate not only to protect these areas, but also to guarantee free access to beaches made private by the granting of concessions, in order to avoid the effective transformation of free access public goods into costly private goods. Generally, it would be desirable for the Public Administration to identify and classify all activities which may give rise to self-protection choices, with reference to the type of subject involved (individuals, firms, Public Administration), the places where such activities are undertaken, and possible responsive actions to be undertaken by the Public Administration.