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Can waste improve welfare?

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  • Pelloni, Alessandra
  • Waldmann, Robert

Abstract

In endogenous growth models with a capital spillover, the market outcome is not Pareto efficient since agents ignore the positive externalities caused by investment. This makes it natural to conclude that taxes on investment or subsidies to consumption will impose first order welfare costs. In fact this is not true in a very simple model of endogenous growth with an infinite liced representative consumer who supplies labour elastically. We present such a model in which, for all parameter values, either a small tax on capital income whose proceeds are thrown away causes increased welfare, or a small marginal subsidy to consumption causes increased welfare. We also show that for a broad range of parameters values, a lump sum tax whose proceeds are also thrown away will increase growth and welfare.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 77 (2000)
Issue (Month): 1 (July)
Pages: 45-79

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Handle: RePEc:eee:pubeco:v:77:y:2000:i:1:p:45-79

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Web page: http://www.elsevier.com/locate/inca/505578

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Possible efficiency gains due to taxes and transfe...
    by Robert in Robert's Stochastic Thoughts on 2007-06-11 12:43:00
  2. What’s wrong with Economath ?
    by Robert Waldmann in Angry Bear on 2013-08-22 08:53:13
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on saving in a growth model," wp.comunite 0071, Department of Communication, University of Teramo.
  2. Mino, Kazuo, 2000. "Optimal Taxation in Dynamic Economies with Increasing Returns," MPRA Paper 17324, University Library of Munich, Germany.
  3. Itaya, Jun-ichi, 2008. "Can environmental taxation stimulate growth? The role of indeterminacy in endogenous growth models with environmental externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1156-1180, April.
  4. Jun-ichi Itaya & Naoshige Kanamori, 2010. "Consumption taxation, social status and indeterminacy in models of endogenous growth with elastic labor supply," Journal of Economics, Springer, vol. 100(2), pages 141-163, June.
  5. Mino, Kazuo, 2002. "Indeterminacy in Two-Sector Models of Endogenous Growth with Leisure," MPRA Paper 16994, University Library of Munich, Germany.
  6. Hsiu-Yun Lee & Yu-Lin Wang & Wen-Ya Chang, 2013. "Can growth-enhanced monetary policy improve welfare when people seek social status?," Journal of Economics, Springer, vol. 110(3), pages 257-272, November.

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