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Optimal growth in overlapping generations with a directly polluting sector and an indirect one

Pierre-André Jouvet, Philippe Michel and Gilles Rotillon

No 2006-1, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: We study the optimal growth path and its decentralization in an overlapping generations model with two consumption goods and pollution effect. We consider two production sector i.e. one with a direct effect of pollution and the other with an indirect pollution effect by using energy. In the presence of externalities, decentralization of an optimal path needs some specific taxes in addition to lump-sum transfers. The introduction of a market for pollution permits, concerning only the polluting sector, neutralizes the external environmental effects. We show that there is a unique management of permits such that the equilibrium coincides with the optimal path: all permits should be auctioned i.e. no free permits to firms. This conclusion is in contradiction with the usual practice of grandfathering.

Keywords: Optimal growth; environment; market of permits. (search for similar items in EconPapers)
JEL-codes: D61 D9 Q28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ene and nep-env
Date: 2006
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