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First-and second-best allocations under economic and environmental uncertainty

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  • Konstantinos Angelopoulos
  • George Economides
  • Apostolis Philippopoulos

    ()

Abstract

This paper uses a micro-founded DSGE model to compare second-best optimal environmental policy, and the resulting Ramsey allocation, to first-best allocation. The focus is on the source and size of uncertainty, and how this affects optimal choices and the comparison between second- and first-best. While higher economic volatility is bad for social welfare in all cases studied, the welfare effects of higher environmental volatility depend on its size and the effectiveness of public abatement policy. The Ramsey environmental tax is pro-cyclical when there is an economic shock, while it is counter-cyclical when there is an environmental shock. Copyright Springer Science+Business Media, LLC 2013

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 20 (2013)
Issue (Month): 3 (June)
Pages: 360-380

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Handle: RePEc:kap:itaxpf:v:20:y:2013:i:3:p:360-380

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: General equilibrium; Uncertainty; Environmental policy; Second best; C68; D81; H23;

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2005. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version," NBER Working Papers 11417, National Bureau of Economic Research, Inc.
  2. Marcus Hagedorn, 2010. "Ramsey Tax Cycles," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1042-1071.
  3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(4), pages 755-775, January.
  4. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
  5. Heutel, Garth, 2011. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Working Papers 11-8, University of North Carolina at Greensboro, Department of Economics.
  6. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  7. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2010. "What is the best environmental policy?Taxes, permits and rules under economic and environmental uncertainty," Working Papers 119, Bank of Greece.
  8. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Philippe Aghion & Peter Howitt, 2009. "The Economics of Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 9780262012638, December.
  10. Pierre-André Jouvet & Philippe Michel & Gilles Rotillon, 2004. "Optimal growth with pollution : how to use pollution permits ?," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) v04012, Université Panthéon-Sorbonne (Paris 1).
  11. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
  12. Garth Heutel, 2011. "Online Appendix to "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks"," Technical Appendices 10-62, Review of Economic Dynamics.
  13. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
  14. George Economides & Apostolis Philippopoulos, 2008. "Growth enhancing policy is the means to sustain the environment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 207-219, January.
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Cited by:
  1. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2012. "Public Good Provision with Robust Decision Making," CESifo Working Paper Series 3996, CESifo Group Munich.
  2. Doda, Baran, 2014. "Evidence on business cycles and CO2 emissions," Journal of Macroeconomics, Elsevier, Elsevier, vol. 40(C), pages 214-227.

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