Second-best tax policy in a growing economy with externalities

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

No 2006-03, 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: elasticity of substitution; second-best policy; growth and the environment (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
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://addi.ehu.es/bitstream/10810/6726/1/wp2006-03.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ehu:dfaeii:200603

Ordering information: This working paper can be ordered from
Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

Access Statistics for this paper

More papers in DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II
Contact information at EDIRC.
Series data maintained by Alcira Macías Redondo ().