Environmental and social degradation as the engine of economic growth

In this paper, a commonly owned resource (an environmental or social asset) and a private good are substitutes in consumption. The households can buy the private good on the market, while the resource is available for free. The resource is renewable, but its ability to regenerate declines with the level of aggregate production: each single firm producing the private good has only a negligible impact on the resource, but the impact caused by the entire population of firms is considerable. In the face of a decrease in the stock of the resource, households are induced to increase their participation in market activities in order to raise their income and buy more private goods. Hence, each household contributes to a further increase in aggregate production, thus causing additional damage to the resource's ability to regenerate and feeding the growth process. Given the presence of negative externalities, multiple equilibrium paths are possible. In this situation, social conventions may guide individuals to coordinate expectations and behavior toward a particular steady state: one can speculate that the dominance of cultural values favorable to a lifestyle based on a mix of high consumption and hard work leads the economy to converge on a Pareto-inferior steady-state. (C) 2002 Elsevier Science B.V. All rights reserved.