Pollution, mortality and time consistent abatement taxes

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Abstract

We study dynamically consistent policy in a neoclassical overlapping generations growth model where pollution externalities undermine health but are mitigated via tax-financed abatement. With arbitrarily constant taxation, two steady states arise: an unstable ‘poverty trap’ and a ‘neoclassical’ steady state near which the dynamics might either be monotonically convergent or oscillating. When the planner chooses a time consistent abatement path that maximises a weighted intergenerational sum of expected utility, the optimal tax is zero at low levels of capital and then a weakly increasing function of the capital stock. The non-homogeneity of the tax function along with its feedback effect on savings induces additional steady states, stability reversals and oscillations.
Original languageEnglish
Pages (from-to)1-15
Number of pages15
JournalJournal of Mathematical Economics
Volume88
Early online date12 Feb 2020
DOIs
Publication statusPublished - May 2020

Keywords

  • Time consistency
  • Pollution
  • Mortality
  • Overlapping generations model
  • Poverty traps
  • Endogenous fluctuations
  • Optimal environmental policy

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