Consumption Externalities, Production Externalities and Efficient Capital Accumulation under Time Non-separable Preferences

Stephen J Turnovsky and Goncalo Monteiro

Discussion Papers from Department of Economics, University of York

Abstract: We examine the effects of both consumption and production externalities on capital accumulation and economic performance under time non-separable preferences and a non-scale production technology. We show that a consumption externality in isolation has long-run distortionary effects if and only if labour is supplied elastically. With fixed labour supply, it has only transitional distortionary effects, though it may generate long-run distortions through its interaction with the production externality. Production externalities always generate long-run distortions, irrespective of labour supply. The optimal taxation to correct for the distortions is characterized. Further quantitative insights are obtained by supplementing the theoretical analysis with numerical simulations based on the calibration of a plausible macroeconomic growth model.

Keywords: Time non-separable preferences; consumption and production externalities; capital accumulation; optimal tax policy (search for similar items in EconPapers)
JEL-codes: D91 E21 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dev, nep-ene and nep-mac
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Related works:
Journal Article: Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences (2007)
Working Paper: Consumption Externalities, Production Externalities, and Efficient Capital Accumulation under Time Non-Separable Preferences (2006)
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