Long-run welfare under externalities in consumption, leisure, and production: A case for happy degrowth vs. unhappy growth

In this paper we contribute to the debate on the relationship between growth and well-being by examining an endogenous growth model where we allow for externalities in consumption, leisure, and production. We analyze three regimes: a decentralized economy where each household makes isolated choices without considering their external effects, a planned economy where a myopic planner fails to recognize both leisure and consumption externalities but recognizes production externalities, and a planned economy with a fully informed planner. We first compare the balanced growth paths under the three regimes and then we numerically investigate the transition to the optimal balanced growth path. We provide a number of findings. First, in a decentralized economy growth or labor (or both) are greater than in the regime with a fully informed planner, and hence are sub-optimal from a welfare standpoint. Second, a myopic intervention which overlooks consumption and leisure externalities leads to more growth and labor than in both the decentralized and the fully informed regime. Third, we provide a case for happy degrowth: a transition to the optimal balanced growth path that is associated with downscaling of production, a reduction in private consumption, and an ongoing increase in leisure and well-being.

► We develop an endogenous growth model with externalities in consumption, leisure, and production. ► If only production externalities are recognized, intervention leads to inefficiently high growth rate and labour. ► During a transition consumption degrowth and production downscale can be welfare improving. ► Economic growth must be partially replaced by relational activities to sustain well-being.► Our results suggest that policies aiming at inducing greater leisure time can turn out to be Pareto improving.