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Consumption Externalities, Production Externalities and Indeterminacy
Author(s) -
Weder Mark
Publication year - 2000
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/1467-999x.00099
Subject(s) - externality , stylized fact , economics , consumption (sociology) , indeterminacy (philosophy) , counterfactual thinking , microeconomics , production (economics) , macroeconomics , social science , philosophy , physics , epistemology , quantum mechanics , sociology
In this paper we show that consumption externalities reduce the degree of increasing returns needed to generate indeterminacy in a two‐sector optimal growth model. In equilibrium, consumption externalities operate as if the utility function is (close to) linear. If these externalities are strong, the minimum necessary increasing returns approach zero. Therefore, this paper—in a stylized fashion—provides an example of how microbehavior, i.e. interactions at the household level, can generate aggregate instability. Consumption externalities also help to eliminate the counterfactual cyclical behavior of consumption in the two‐sector model.