This paper explores the theoretical linkage between habit and the environment through environmentally harmful consumption affected by habitual behavior. It is shown that habit formation of consumption has both negative and positive effects on environmental quality. Whether the positive effect dominates the negative one depends on the degrees of habit formation and environmental externalities.environmental quality

Tetsuo Ono

English

Research Papers in Economics

Is habitual consumption harmful to the environment? 
Tetsuo Ono
Institute of Policy and Planning Sciences, University of Tsukuba
Abstract
This paper explores the theoretical linkage between habit and the environment through
environmentally harmful consumption affected by habitual behavior. It is shown that habit
formation of consumption has both negative and positive effects on environmental quality.
Whether the positive effect dominates the negative one depends on the degrees of habit
formation and environmental externalities.
Citation: Ono, Tetsuo, (2002) "Is habitual consumption harmful to the environment?." Economics Bulletin, Vol. 17, No. 1 pp.
1−10
Submitted: December 27, 2001.  Accepted: September 3, 2002.
URL: http://www.economicsbulletin.com/2002/volume17/EB−01Q20003A.pdf1. Introduction
This paper explores the theoretical linkage between habit and the envi-
ronment through environmentally harmful consumption aﬀected by habitual
behavior, focusing on how habit formation of consumption aﬀects environ-
mental quality, and whether this consumption is harmful to the environment.
It is shown that habit formation of consumption has both negative and pos-
itive eﬀects on environmental quality. Which eﬀect dominates is dependent
on the degrees of habit formation and environmental externalities. Hence,
the paper provides a simple condition for evaluating the eﬀect of habitual
consumption on environmental quality.
The relation between habitual consumption and the environment has been
mainly studied by psychologists; see Fransson and Garling (1999) and the
references therein. Psychologists have indicated the possibility that habit
formation of consumption increases consumption of luxury or durable goods,
such as cars and air conditioners, which creates environmentally harmful
emissions. Thus, they concluded that habit formation of consumption would
cause environmental deterioration.
They, however, drew this conclusion without using models to explain
the relation between habitual consumption and the environment. Hence,
from psychological studies, this relationship, and the economic interaction
it entails, cannot be known. It is therefore necessary to develop a model of
environmentally harmful consumption aﬀected by habitual behavior, and to
establish the way in which habitual consumption aﬀects the environment.
There are few economic studies on habit formation and the environment.
Wendner (2000a, 2000b) is one such study. Following Lahiri and Puhakka
(1998) and a previous report of his own (Wendner (2000c)), he introduced
habit formation into two-period overlapping generations models by assum-
ing that a higher ﬁrst period consumption reduces utility derived from a
given level of second period consumption. However, while he focused on the
relation between habit formation and the environment, he did not consider
this relationship in terms of environmentally harmful consumption.1 Against
such background, this paper addresses that issue, and provides a simple con-
dition for evaluating the eﬀect. This paper would therefore contribute to the
1Wendner (2000a) focuses on environmentally harmful production. Wendner (2000b)
considers environmentally harmful consumption, but the main focus is on the design of
optimal tax schemes; how habit aﬀects environmental quality through consumption is not
examined.
1literature on consumption and its eﬀect on the environment by clarifying the
relation between them.
This paper is organized as follows. Section 2 develops the model and char-
acterizes equilibrium. Section 3 shows the main result. Section 4 provides
concluding remarks.
2. The Model
Consider an inﬁnite-horizon economy comprised of two-period-lived over-
lapping generations. A new generation is born in each period t = 1,2,... The
size of a newly born generation is normalized to one.
Each generation lives for two periods, youth and old age, and obtains
utility from consumption in both periods and environmental quality in old
age.2 However, in the presence of habit formation, utility of a given level of
consumption in old age is not independent of consumption in youth. Utility
is aﬀected by the absolute level of consumption in old age as well as the
increase of consumption in old age relative to that in youth. Let c1
t denote
consumption of generation t in the ﬁrst period (youth), c2
t+1 consumption of
generation t in the second period (old age), and Et+1 environmental quality
in period t + 1. Then, the lifetime utility of an agent in generation t is
(c1
t)1−θ − 1
1 − θ
+ π

(ˆ c2
t+1)1−θ − 1
1 − θ
+ η
(Et+1)1−θ − 1
1 − θ

where ˆ c2
t+1 ≡ c2
t+1 − hc1
t is the eﬀective consumption in old age, θ(> 0)
denotes the magnitude of the elasticity of marginal utility with respect to
consumption or environmental quality, π(> 0) is the subjective discount
factor, η(> 0) denotes the degree of environmental concern, and h(> 0)
denotes the degree of habit formation; a higher h implies a greater intensity
of habit formation.3
The environment is assumed to be a public good that is reduced by con-
sumption but can be improved by maintenance investment. This mechanism
is expressed as the formula:4
Et+1 = Et − β(c
1
t + c
2
t) + γmt, (1)
2As described below, each generation cannot control environmental quality in the period
of youth. Thus, it is assumed that environmental quality in youth has no eﬀect on utility.
3This form of habit formation follows from Lahiri and Puhhaka (1998) and Wendner
(2000c, 2002).
4This simple formulation is based on John and Pecchenino (1994) and John et al.
(1995).
2where Et(Et+1) is the index of environmental quality in period t(t+1), β > 0
is a parameter of consumption externalities, c1
t +c2
t is the aggregate consump-
tion in period t, γ > 0 is a parameter that represents the technology for en-
vironmental maintenance, and mt is the aggregate maintenance investment
made for the environment in period t. The maintenance activity in period
t is conducted by generation t since this generation can enjoy the improved
environmental quality in its old age.
Each generation is endowed with w ∈ <++ units of a private good when
young and with nothing when old. Each generation can access a storage
technology with a gross return rate of R > 0. If a generation invests one unit
of a private good when young, then it can obtain R units when old.5 Thus, the
budget constraint of generation t is c1
t +st+mt = w in youth and c2
t+1 = Rst
in old age where st is the amount of investment in a storage technology.
These constraints are summarized as the life-cycle budget constraint:
c
1
t + c
2
t+1/R + mt = w. (2)
Generation t chooses {c1
t,st,mt} to maximize its utility subject to the
life-cycle budget constraint (2) and the environmental equation (1). The
ﬁrst-order conditions which characterize the outcome of generation t are
(c
1
t)
−θ =

β + γ +
hγ
R

πη(Et+1)
−θ, (3)
R(c
2
t+1 − hc
1
t)
−θ = γη(Et+1)
−θ, (4)
and (1) and (2) where c2
t and Et are determined by the previous generation.6
Eq.(3) states that generation t chooses consumption when young, equat-
ing the marginal rate of substitution between consumption in youth and
environmental quality in old age to the marginal rate of transformation,
β + γ + hγ/R. At the utility maximum, a decrease in utility due to falling
5The model presented here keeps the production side as simple as possible by adopting
a linear storage technology, since our focus is, rather, on the eﬀect of habitual consumption
on environmental quality.
6The present paper focuses on environmental externalities across generations (i.e., Et
and c2
t), ignoring externalities within a generation. This is because there have been growing
concerns on intergenerational environmental problems; for example, the accumulation of
greenhouse gases and the depletion of tropical forests. Such problems are mainly caused
by myopic consumption behavior of each generation. Herein such behavior is linked to
habitual consumption, and its environmental consequences are considered.
3consumption during youth is equal to an increase in utility due to the sum of
an increase in maintenance eﬀort, γ(1+h/R), and a decrease in a consump-
tion externality, β. Eq.(4) states that generation t chooses savings, equating
the marginal rate of substitution between the eﬀective consumption in old
age, c2
t+1 −hc1
t, and environmental quality in old age to the marginal rate of
transformation, γ/R. At the utility maximum, a decrease in utility due to
falling consumption during old age, R, is equal to an increase in utility due
to an increase in maintenance eﬀort, γ.
The economy starts at t = 1. In this period, there are generation 1 and the
initial old agent who lives only in period 1. The initial old agent is endowed
with ω units of a private good to consume. The utility of the initial old agent
is {(c2
1)1−θ − 1}/(1 − θ) + η{(E1)1−θ − 1}/(1 − θ) where c2
1 = ω and E1 are
given.
It should be noted that the model presented here is based on the models
of John and Pecchenino (1994) and John et al.(1995), but diﬀers from theirs
in that habit formation of consumption is introduced here. Habit formation
would decrease consumption in youth and increase savings (i.e., consumption
in old age); the former has a positive eﬀect, whereas the latter has a negative
eﬀect on the environment. The environmental consequence of these eﬀects
will be considered in the next section.
The remaining task in this section is to characterize an equilibrium, de-
ﬁned as follows. An equilibrium is a sequence {c1
t,c2
t,Et,mt}∞
t=1 with the
initial condition {c2
1,E1} such that each generation maximizes its utility sub-
ject to the budget constraints and the environmental equation. A steady
state equilibrium is an allocation such that {c1,c2,E,m} is stationary along
the equilibrium path. In particular, the steady state equilibrium levels of
consumption and environmental quality, {c1,c2,E}, are characterized by the
following three equations:
(c
1)
−θ =

β + γ +
hγ
R

πη(E)
−θ, (5)
R(c
2 − hc
1)
−θ = γη(E)
−θ, (6)
β(c
1 + c
2) = γ

w − c
1 −
c2
R

. (7)
These three equations lead to the existence and uniqueness of the steady
state equilibrium. The next section presents the analysis conducted at this
steady state.
43. The Eﬀects of Habit Formation on the Environment
This section examines how habit formation aﬀects the steady state equi-
librium level of environmental quality, then discusses the implication of the
result for an economy under habit formation.
Proposition 1: Habit formation improves (harms) environmental quality
if and only if θ ≶ φ(h) where
φ(h) ≡
γ
R
β +
γ
R
 
1 +
β
β+γ
h +
γ
R
!
.
That is, ∂E/∂h ≷ 0 if and only if θ ≶ φ(h). Moreover, ∂c1/∂h < 0
and ∂c2/∂h > 0 hold ∀h ≥ 0.
Proof: Diﬀerentiation of (5) - (7) with respect to c1,c2,E, and h yields


−θ(c1)−θ−1 0 πηθ(β + γ + γh/R)(E)−θ−1
Rhθ(ˆ c2)−θ−1 −Rθ(ˆ c2)−θ−1 θγη(E)−θ−1
β + γ β + γ/R 0




dc1
dc2
dE


=


πηγ(E)−θ/R
−θRc1(ˆ c2)−θ−1
0

dh.
It is immediately shown that the determinant of the left-hand side matrix
is positive. Let |D| denote the determinant. By Cramer’s rule,
∂E
∂h
=
Rθπη
|D|(ˆ c2)θ+1(E)θ

γ
R
(β + γ) − θ

β + γ +
γh
R

β +
γ
R

+ h
γ
R

β +
γ
R

.
Thus, we obtain ∂E/∂h ≷ 0 if and only if θ ≶ φ(h). We also obtain
∂c1/∂h < 0 and ∂c2/∂h > 0 ∀h ≥ 0 by using Cramer’s rule. Q.E.D.
Figure 1 depicts the relation between θ and φ(h). The function φ(h) is
strictly increasing and strictly concave in h with limh→0 φ(h) = (γ/R)/(β +
γ/R) < 1 and limh→+∞ φ(h) = 1. If θ ≥ 1, then ∂E/∂h < 0 ∀h ≥ 0; that is,
habit formation is always harmful to the environment. On the other hand,
if θ < (γ/R)/(β + γ/R), then ∂E/∂h > 0∀h > 0; that is, habit formation
is always beneﬁcial to the environment. Finally, if θ ∈ [(γ/R)/(β + γ/R)
5,1), the initial value of h is important in determining the impact of habit
formation on the environment. Given θ, there exists a critical level of h, ˜ h(θ),
such that ∂E/∂h ≷ 0 if and only if h ≷ ˜ h(θ).
Habit formation has eﬀects on environmental quality in two directions
through consumption. First, a higher h leads to a smaller amount of con-
sumption in youth: this has a positive eﬀect on the environment. Second,
a higher h leads to a larger amount of savings, and, consequently, a larger
amount of consumption in old age: this has a negative eﬀect on the environ-
ment. Whether the positive eﬀect overcomes the negative one depends on
parameter values in the inequality condition θ ≶ φ(h).
When the inequality θ ≤ (γ/R)/(β + γ/R) holds, habit formation is
always beneﬁcial to the environment. This inequality requires small β and
R, given θ and γ. Although habit formation aﬀects consumption, its eﬀect
on the environment is inconsiderable due to a small value of β. In addition,
habit formation leads to an increase of consumption in old age, but varies
only to a minor degree since the return on saving, R, is low: this gives a
weak eﬀect on the environment. Due to these two eﬀects, the positive eﬀect
of habit formation is always greater than the negative one. Therefore, habit
formation improves environmental quality if θ ≤ (γ/R)/(β + γ/R).
When the inequality θ > (γ/R)/(β+γ/R) holds, the opposite result may
occur. The inequality requires large β and R, implying a greater eﬀect on
the environment through consumption. In particular, the negative eﬀect of
habit formation is always greater than the positive one when θ ≥ 1 holds.
When θ ∈ ((γ/R)/(β + γ/R) ,1), the initial degree of habit formation plays
a key role in determining the eﬀect. We can evaluate the eﬀect by using
the condition θ ≶ φ(h), which is rewritten as h ≷ ˜ h(θ) where ˜ h(θ) satisﬁes
θ = φ(h). When the initial value of h is below the critical level ˜ h(θ), a
marginal increase in h has a strong eﬀect on the environment; thus, a greater
intensity of habit formation leads to a lower quality environment. On the
other hand, when the initial value of h is above the critical level, a marginal
increase in h has a weak eﬀect on the environment; thus, a greater intensity
of habit formation leads to a higher quality environment.
The result suggests that when θ ∈ ((γ/R)/(β +γ/R) ,1) holds, there ex-
ists another critical level of the degree of habit formation, ˆ h(θ)(> ˜ h(θ)), such
that E|h=0 ≷ E|h>0 holds if and only if h ≶ ˆ h(θ) (see Figure 2). That is, if
the initial degree of habit formation h is greater (less) than the critical level
ˆ h(θ), then the environmental quality without habit formation, E|h=0 , is less
(greater) than the quality under the presence of habit formation, E|h>0. For
6a higher (lower) degree of habit formation, the economy experiences a higher
(lower) quality environment relative to the economy without habit forma-
tion. Thus, the presence of habitual consumption behavior is not necessarily
harmful to the environment. A strong intensity of habit formation may be
desirable from the viewpoint of environmental preservation.
4. Concluding Remarks
This paper has considered the eﬀect of habit formation on environmen-
tal quality in a two-period overlapping generations model in which (i) habit
formation is assumed such that higher ﬁrst-period consumption reduces the
utility from a given level of second-period consumption, and (ii) environmen-
tal quality is reduced by consumption. Under this framework, the paper has
shown that whether habitual consumption is harmful to the environment de-
pends on the degrees of habit formation and environmental externalities of
consumption. Thus, this paper has provided a simple condition for analyzing
environmental consequence of habit formation.
The present paper is closely related to the paper by Wendner (2000a),
who showed that, in most cases, habit formation of consumption is harmful to
the environment. The result shown in Proposition 1, which diﬀers from that
in Wendner (2000a), is derived from the following two assumptions that dif-
fer from him. First, his paper assumes that environmental quality is reduced
by production, whereas this paper assumes that it is reduced by consump-
tion. Second, Wendner (2000a) focuses on the behavior of an atomistic agent
who does not take care of the environment, whereas this paper focuses on a
representative agent (i.e., a generation) who takes care of the environment.
Thus, the analysis of this paper focuses on the eﬀect of generations’ behavior
on environmental quality rather than on that of atomistic agents’ behavior
as analyzed in Wendner (2000a). Based on the two diﬀerent presumptions
used here, this paper could present a new aspect of habit formation and
environmental quality.
7References
Fransson, N., and T. Garling (1999) “Environmental concern: concep-
tual deﬁnitions, measurement methods, and research ﬁndings” Journal of
Environmental Psychology 19, 369-382.
John, A., and R. Pecchenino (1994) “An overlapping generations model
of growth and the environment” Economic Journal 104, 1393-1410.
John, A., Pecchenino, R., Schimmelpfennig, D., and S. Schreft (1995)
“Short-lived Agents and the Long-lived Environment” Journal of Public Eco-
nomics 58, 127-141.
Lahiri, A., and M. Puhakka (1998) “Habit persistence in overlapping
generations economies under pure exchange” Journal of Economic Theory
78, 176-186.
Wendner, R. (2000a) “Habit formation and environmental policy: an
overlapping generations approach” mimeo.
Wendner, R. (2000b) “Environmental Externalities and Consumer’s Frames
of Reference” Stanford Institute for Economic Policy Research Discussion
Paper No. 00-10.
Wendner, R. (2000c) “A policy lesson from an overlapping generations
model of habit persistence” Burch Center Working Paper B00-02, University
of California, Berkeley: Department of Economics.
Wendner, R. (2002) “Capital accumulation and habit formation” Eco-
nomics Bulletin 4, 1-10.
8  Figure 1 
      θ  
 
 
      1  
           0 / < ∂ ∂ h E             ) (h φ  
 
 
R
R
/
/
γ β
γ
+
             0 / > ∂ ∂ h E  
       0         ) (
~
θ h                      h  
 
 
 
  Figure 2 
      E  
 
                               0 | > h E  
       
                        
                                     0 | = h E  
               
        
0       ) (
~
θ h           ) ( ˆ θ h           h  
 

Is habitual consumption harmful to the environment?

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Is habitual consumption harmful to the environment?

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