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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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References

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  1. Danyang Xie, 2002. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," GE, Growth, Math methods 0210002, EconWPA.
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  5. Smulders, J.A. & Gradus, R.H.J.M., 1993. "Pollution abatement and long-term growth," Discussion Paper 1993-73, Tilburg University, Center for Economic Research.
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  8. Roger E.A. Farmer, 1994. "Indeterminacy and Sector-Specific Externalities," UCLA Economics Working Papers 722, UCLA Department of Economics.
  9. Mohtadi, Hamid, 1996. "Environment, growth, and optimal policy design," Journal of Public Economics, Elsevier, vol. 63(1), pages 119-140, December.
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  14. Fernandez, Esther & Novales, Alfonso & Ruiz, Jesus, 2004. "Indeterminacy under non-separability of public consumption and leisure in the utility function," Economic Modelling, Elsevier, vol. 21(3), pages 409-428, May.
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Cited by:
  1. Gaspar, J. & Vasconcelos, P.B. & Afonso, O., 2014. "Economic growth and multiple equilibria: A critical note," Economic Modelling, Elsevier, vol. 36(C), pages 157-160.
  2. Hosoya, Kei, 2012. "Growth and multiple equilibria: A unique local dynamics," Economic Modelling, Elsevier, vol. 29(5), pages 1662-1665.
  3. 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, vol. 146(2), pages 569-591, March.
  4. Eugenia Vella & Evangelos Dioikitopoulos & Sarantis Kalyvitis, . "Green Spending Reforms, Growth and Welfare with Endogenous Subjective Discounting," DEOS Working Papers 1335, Athens University of Economics and Business.
  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, vol. 32(4), pages 1156-1180, April.
  6. Yanase, Akihiko, 2011. "Impatience, pollution, and indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1789-1799, October.
  7. Fernández, Esther & Pérez, Rafaela & Ruiz, Jesús, 2012. "The environmental Kuznets curve and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1700-1717.

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