Can the environment be an inferior good? A theory with context-dependent substitutability and needs

Abstract

Theoretical models often assume the environment to be a normal good, irrespective of one’s income. However, a priori, nothing prohibits an environmental good from being normal for some individuals and inferior for others. We develop a conceptual framework in which private consumption and an environmental public good act as substitutes or complements for satisfying different needs. Subsequently, the environment can switch between normal and inferior depending on one’s income and environment. If the environment is inferior for some range of income, then the willingness to pay for environmental preservation becomes non-monotonic, thereby having implications for benefit transfers.