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