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 language | English |
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Pages (from-to) | 1-15 |
Number of pages | 15 |
Journal | Journal of Mathematical Economics |
Volume | 88 |
Early online date | 12 Feb 2020 |
DOIs | |
Publication status | Published - May 2020 |
Keywords
- Endogenous fluctuations
- Mortality
- Optimal environmental policy
- Overlapping generations model
- Pollution
- Poverty traps
- Time consistency