Living in an uncertain world : environment substitution, local and global indeterminacy

Abstract

Environmental problems are increasingly frequent, intensive and unpredictable. To protect from the observed environmental depletion, economic agents increasingly react by substituting previously free public environmental goods with costly private goods. This substitution mechanism, however, can contribute to enhance the indeterminacy of the possible consequences of mankind activity, further increasing the uncertainty on the future environmental trajectories. To investigate this issue, the paper proposes an intertemporal optimization problem in which agents derive utility from three goods: leisure, a public environmental good and/or private consumption that can be used as a substitute for the environment. The analysis shows that the economy may end up being trapped in the Pareto-dominated steady state and that both local and global indeterminacy may arise in the model. No indeterminacy, however, emerges if green technologies are used so that production has no negative effects on the environment.