Household production and Environmental Kuznets Curves

This paper provides a theoretical explanation for the widely debated empirical finding of "Environmental Kuznets Curves", i.e., U-shaped relationships between per-capita income and indicators of environmental quality. We present a household-production model in which the degradation of environmental quality is a by-product of household activities. Households can not directly purchase environmental quality, but can reduce degradation by substituting more expensive cleaner inputs to production for less costly dirty inputs. If environmental quality is a normal good, one expects substitution towards the less polluting inputs, so that increases in income will increase the quality of the environment. It is shown that this only holds for middle income households. Poorer households spend all income on dirty inputs. When they buy more, as income rises, the pollution also rises, they do not want to substitute, as this would reduce consumption of non-environmental services for environmental amenities that are already abundant. Thus, as income rises from low to middle levels, a U shape can result. Yet an N shape might eventually result, as richer households spend all income on clean inputs. Further substitution possibilities are exhausted. Thus as income rises again pollution rises and environmental quality falls.

Duke Scholars

Author Alexander Pfaff Sanford School of Public Policy