ALBERT

Description: We develop an overlapping generations (OLG) model with two intermediate inputs, clean and dirty, and one final output in order to consider the interplay between the environment, life expectancy, and capital accumulation, and to consider the possibilities of reallocating capital between the clean and dirty sectors to improve social welfare. We show that the multiple distinct steady states, (and even the continuum of steady state), may occur in a competitive economy. Hence, an economy may fall into a poverty-environment trap that is characterized by low environmental quality, low life expectancy, and therefore, low per capita physical capital, while the others may converge to the opposite steady state. The competitive steady states differ from the first-best steady state in the benevolent social planner’s viewpoint not only because of imperfect altruism between generations in the competitive economy, but also because individuals cannot internalize the effects of their savings (capital accumulation) and capital allocation on environmental quality through producing dirty intermediate inputs, whereas the social planner can. So we propose fiscal strategies towards social planner’s steady state. These fiscal strategies, which are combination of traditional Pigouvian taxes and capital income tax implemented for transition phase are quite new compared to the existing related literature. Although we focus on the transition phase, the proposed taxes are stationary. They include: (i) a set of tax and subsidy imposed on the production of dirty and clean intermediate inputs to improve environmental quality, and therefore, life expectancy and capital accumulation, in order to guarantee that an economy that is locked in a poverty-environment trapcan escape such the stagnation; and (ii) a set of taxes (subsidies) imposed on the production of intermediate inputs and capital income in order to decentralize the transition to the first-best steady state as a competitive outcome.

Description: We consider an overlapping generations (OLG) economy with land as a fixed factor of production and an environmental externality on production in which tax revenue from land rent and/or from other schemes such as labor income, capital income, and production taxation can be used for environmental protection through investment in emission mitigation. We show that, for any given target of stationary stock of pollution, the land rent taxation scheme leads to a higher steady state capital accumulation than the other schemes, and hence the steady state consumption of agents when young under this scheme is also higher than under the others. In addition, under an ambitious mitigation target when the efficiency of the mitigation technology is relatively high compared to the dirtiness of production, the land rent taxation also provides a higher steady state consumption when old, resulting in higher social welfare, than the others. In the second part of the paper, we propose a period-by-periodbalanced budget policy, which includes land rent and capital income taxes with intergenerational transfers, to decentralize the socially optimal allocation during the transitional phase to the social planner's steady state.