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Global and local indeterminacy and optimal environmental public policies in an economy with public abatement activities

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Abstract

We study the dynamic properties of an endogenous growth model with pollution in which the government can control the pollution through distorting taxes on the pollutant firms and through public abatement activities. First, we characterize the conditions for indeterminacy of equilibria when the government is benevolent and chooses its tax policy by taking into account the decentralized competitive equilibrium. Under this second best setup we show that two balanced growth paths can be found (one with a low level of pollution and the other with a high level) both of which can be locally indeterminate. Therefore, under indeterminacy, the optimal public policies do not guarantee that the economy will converge towards the steady state characterized by a low level of pollution and neither guarantee that the economy will display, along the transition, low levels of pollution. Second, we show that the central planner solution might also display indeterminacy; in particular, two Pigouvian taxes can be found.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/79.

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Length: 26 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cea:doctra:e2004_79

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Keywords: Global and local indeterminacy; Environmental taxes; Pollution; Abatement; Pigouvian taxes;

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  1. Mohtadi, Hamid, 1996. "Environment, growth, and optimal policy design," Journal of Public Economics, Elsevier, Elsevier, vol. 63(1), pages 119-140, December.
  2. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental tax reform and endogenous growth," Discussion Paper, Tilburg University, Center for Economic Research 1994-98, Tilburg University, Center for Economic Research.
  3. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 19-41, June.
  4. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers, UCLA Department of Economics 680, UCLA Department of Economics.
  5. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(1), pages 7-36, July.
  6. Xie Danyang, 1994. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 97-112, June.
  7. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(3), pages 421-443, June.
  8. Benhabib, Jess & Nishimura, Kazuo, 1996. "Indeterminancy and Sunspots with Constant Returns," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-44, C.V. Starr Center for Applied Economics, New York University.
  9. Bennett, Rosalind L. & Farmer, Roger E. A., 2000. "Indeterminacy with Non-separable Utility," Journal of Economic Theory, Elsevier, Elsevier, vol. 93(1), pages 118-143, July.
  10. 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.
  11. Ligthart, Jenny E. & van der Ploeg, Frederick, 1994. "Pollution, the cost of public funds and endogenous growth," Economics Letters, Elsevier, Elsevier, vol. 46(4), pages 339-349, December.
  12. Roberto Perli, 1995. "Indeterminacy, Home Production, and the Business Cycle: a Calibrated Analysis," Home Pages, University of Pennsylvania _042, University of Pennsylvania.
  13. Park, Hyun & Philippopoulos, Apostolis, 2004. "Indeterminacy and fiscal policies in a growing economy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(4), pages 645-660, January.
  14. Smulders, J.A. & Gradus, R.H.J.M., 1993. "Pollution abatement and long-term growth," Discussion Paper, Tilburg University, Center for Economic Research 1993-73, Tilburg University, Center for Economic Research.
  15. Weder, Mark, 1998. "Fickle Consumers, Durable Goods, and Business Cycles," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(1), pages 37-57, July.
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Cited by:
  1. Antoci, Angelo & Galeotti, Marcello & Russu, Paolo, 2011. "Poverty trap and global indeterminacy in a growth model with open-access natural resources," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(2), pages 569-591, March.
  2. Fernández, Esther & Pérez, Rafaela & Ruiz, Jesús, 2012. "The environmental Kuznets curve and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(11), pages 1700-1717.
  3. Eugenia Vella & Evangelos Dioikitopoulos & Sarantis Kalyvitis, . "Green Spending Reforms, Growth and Welfare with Endogenous Subjective Discounting," DEOS Working Papers, Athens University of Economics and Business 1335, Athens University of Economics and Business.
  4. Yanase, Akihiko, 2011. "Impatience, pollution, and indeterminacy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(10), pages 1789-1799, October.
  5. 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, Elsevier, vol. 32(4), pages 1156-1180, April.
  6. Hosoya, Kei, 2012. "Growth and multiple equilibria: A unique local dynamics," Economic Modelling, Elsevier, Elsevier, vol. 29(5), pages 1662-1665.
  7. Gaspar, J. & Vasconcelos, P.B. & Afonso, O., 2014. "Economic growth and multiple equilibria: A critical note," Economic Modelling, Elsevier, Elsevier, vol. 36(C), pages 157-160.

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