Environmental offsets and production externalities under monopolistic competition.

Abstract

In a monopolistically competitive model with production externalities, where individuals voluntarily provide offsets which compensate for degradation of environmental quality caused by their income earning activities, this paper examines how an increase in the population size affects the equilibrium levels of environmental quality, offsets, and net contributions. Whether labor supply is institutionally constrained or not, as the population size increases, environmental quality decreases and converges to zero. However, since offsets increase and converge to the degradation rate of environmental quality, the carbon neutrality theorem holds: net contributions are zero. These results are independent of the specification of the utility function.