Second-best tax policy in a growing economy with externalities

Steven P. Cassou (), Arantza Gorostiaga (), María-José Gutiérrez () and Stephen F. Hamilton ()

DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

Abstract: This paper investigates the exploitation of environmental resources in a growing economy within a second-best …scal policy framework. Agents derive utility from two types of consumption goods –one which relies on an environmental input and one which does not –as well as from leisure and from environmental amenity values. Property rights for the environmental resource are potentially incomplete. We connect second best policy to essential components of utility by considering the elasticity of substitution among each of the four utility arguments. The results illustrate potentially important relationships between environmental amentity values and leisure. When amenity values are complementary with leisure, for instance when environmental amenities are used for recreation, taxes on extractive goods generally increase over time. On the other hand, optimal taxes on extractive goods generally decrease over time when leisure and environmental amenity values are substitutes. Unders some parameterizations, complex dynamics leading to nonmonotonic time paths for the state variables can emerge.

Keywords: Growth and the environment; Elasticity of substitution; Second-best policy (search for similar items in EconPapers)
JEL-codes: H23 O41 Q28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-pbe, nep-pub and nep-upt
Date: 2006-10-16
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Dpto. de Fundamentos del Análisis Económico II, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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