A Model of the Pollution-Income Relationship

(Reference: Andreoni & Levinson, Jr. of Public Economics, 2001)

Consider a single agent economy with two goods – one ‘good’ and one ‘bad’

Let, U = U(C, P) -- (1)

where, C is consumption, and P is pollution; UC > 0 and UP < 0

With only one person, the public-private distinction for P is irrelevant.

Pollution is a by-product of consumption. Let E be the environmental effort

– the consumer can prevent pollution or abate it by this expenditure

Let, P = P(C, E) -- (2)

where, E is the environmental effort; PC > 0 and PE < 0

Let M be the resource endowment. We have M = C + E

(Normalize the relative costs of C and E to be 1)

Simple Case

Let, U = C – zP -- (3)

P = C - CE -- (4)

Utility as specified above is linear and additive in C and P.

z > 0, is the constant marginal disutility of pollution.

The pollution as specified above has two components:

a) First, C, is the gross pollution before abatement and is directly

proportional to consumption
b) The second term, CE, represents ‘abatement’

Eq. (4) indicates that consumption causes pollution one-for-one, but that
resources spent on environmental effort abate that pollution with a
standard concave production function.
Consider z = 1

Substituting (4) into (3) implies that the individual is maximizing CE
subject to C+E = M

Hence, we have standard Cobb-Douglas solutions:


C*  M
 
-- (5)

E*  M
 

Optimal quantity of pollution will be:

  
P * (M )  M ( ) ( )  M   -- (6)
     

Slope of EKC is given by the derivative of (6) with respect to M

P *         1 -- (7)
  (   )( ) ( ) M
M       

The sign of (7) depends on  and .

When + = 1, then the effort spent abating pollution has constant returns
to scale, and P*/M is constant.

Given 0  ,   1, P* rises with M and there is no downward sloping

portion of pollution-income curve.

When +  1, the second derivative of (6) is:

 2 P*        2
 (    1)(   ) ( ) ( ) M -- (8)
M 2
   

If + < 1, then abatement technology exhibits diminishing returns to

scale, and P*(M) is convex.
If + >1, then abatement technology exhibits increasing returns to scale,
and P*(M) is concave.

* * *
+ > 1
P P + < 1 P

+ = 1

M M M

Consider z  1

The model will be, Max. U = C – z(C - CE), subject to, C+E = M

Solving the model we get,

 1 z
C*  M
  z (   )C  1 ( M  C )  1
-- (9)
 1 z
 M B , B0
  z


Note that, for z= 1, we get C *  M
 

If z < 1, then C* is larger than in (5), and pollution is also correspondingly

larger at every level of income.

For z > 1, people have a higher disutility from pollution and C* and P* are
smaller (than those in (5).

Though the absolute values of C* and P* change in response to changes in z,

the implications for inverse U curve remain same.

The basic point is that income pollution relationship depends on

technology link. High income individuals demand more consumption and
less pollution. When abatement is possible with increasing returns, high
income individuals can more easily achieve both goals.