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Environmental fiscal policies might be ineffective to control pollution

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Abstract

In a one sector growth model with pollution in the utility function, the competitive equilibrium can be indeterminate for plausible values of the intertemporal substitution elasticity of consumption and under constant returns to scale. The tax rate on pollution does not enter the condition characterizing indeterminacy. This means that the government is not able to control emissions in the economy by using environmental policies. Non-separability between private consumption and pollution in the utility function is crucial for this result.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2003/48.

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Length: 17 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:cea:doctra:e2003_48

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Keywords: Indeterminacy; Environmental taxes; Pollution;

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  1. Roger E.A. Farmer, 1994. "Indeterminacy and Sector-Specific Externalities," UCLA Economics Working Papers, UCLA Department of Economics 722, UCLA Department of Economics.
  2. Bennett, R.L. & Farmer, R.E.A., 1999. "Indeterminacy with Non-Separable Utility," Economics Working Papers, European University Institute eco99/34, European University Institute.
  3. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 42-72, June.
  4. Fernandez, Esther & Novales, Alfonso & Ruiz, Jesus, 2004. "Indeterminacy under non-separability of public consumption and leisure in the utility function," Economic Modelling, Elsevier, Elsevier, vol. 21(3), pages 409-428, May.
  5. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, Econometric Society, vol. 53(3), pages 503-43, May.
  6. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
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