Subsistence, Substitutability and Sustainability in Consumption
We propose a representation of individual preferences with a subsistence requirement
in consumption, and examine its implications for substitutability and sustainability.
Specifically, we generalize the standard constant-elasticity-of-substitution (CES) utility
specification for manufactured goods and environmental services, by adding a subsistence
requirement for environmental services. We find that the Hicksian elasticity of substitution
strictly monotonically increases with the consumption of environmental services above the
subsistence requirement, and approaches the standard CES value as consumption becomes
very large. Whether the two goods are market substitutes depends on the level of income.We
further show that the subsistence requirement may jeopardize the existence of an intertemporally
optimal and sustainable consumption path. Our results have important implications
for growth, development and environmental policy.