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WELFARE IMPLICATIONS OF THE INTERACTION BETWEEN HABITS AND CONSUMPTION EXTERNALITIES *
Author(s) -
AlonsoCarrera Jaime,
Caballé Jordi,
Raurich Xavier
Publication year - 2006
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2006.00388.x
Subject(s) - externality , economics , consumption (sociology) , welfare , microeconomics , order (exchange) , general equilibrium theory , competitive equilibrium , market economy , social science , finance , sociology
We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit‐adjusted consumption are not perfect substitutes.