Growth models and new goods

Growth models typically assume an inaccurate equivalence between the consumption of greater quantities of existing products (as an individual achieves by growing richer, all else equal) and the consumption of new products. As a result, they typically arbitrarily understate the welfare benefits of growth. They also arbitrarily overstate the extent which future growth will motivate a substitution from consumption to other goods. Finally, a more realistic model of new product introduction can be shown to alleviate the equity premium puzzle: steeply diminishing marginal utility in within-period consumption is compatible with a high saving rate because the marginal utility of consumption will be higher when new products are available.

That is a new paper from Philip Trammell, via Kris Gulati.

This also has implications for who should be subject to congestion pricing.  I am currently in Chennai, which can be quite congested, most of all on the roads.  Some kind of congestion fee (if it were possible to enforce) would be appropriate.  But such a fee probably should not be levied on those who come to Chennai to consume new goods, or in other words visitors and outsiders.  Those are also the people most likely to learn things from being in Chennai, and then to apply those learnings elsewhere.  Beware of those who apply only a single microeconomic idea!