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Can Waste Improve Welfare?

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Author Info

  • Pelloni, A.
  • Waldmann, R.

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

Paper provided by European University Institute in its series Economics Working Papers with number eco97/12.

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Length: 23 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:eui:euiwps:eco97/12

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Keywords: INVESTMENTS ; TAXES ; EXTERNALITIES;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. What’s wrong with Economath ?
    by Robert Waldmann in Angry Bear on 2013-08-22 08:53:13
  2. Possible efficiency gains due to taxes and transfe...
    by Robert in Robert's Stochastic Thoughts on 2007-06-11 12:43:00
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Cited by:
  1. Xin Long & Alessandra Pelloni, 2012. "Welfare Improving Taxation on Savings in a Growth Model," CEIS Research Paper 218, Tor Vergata University, CEIS, revised 27 Jan 2012.
  2. 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.
  3. 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.
  4. 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.
  5. Mino, Kazuo, 2002. "Indeterminacy in Two-Sector Models of Endogenous Growth with Leisure," MPRA Paper 16994, University Library of Munich, Germany.
  6. Mino, Kazuo, 2000. "Optimal Taxation in Dynamic Economies with Increasing Returns," MPRA Paper 17324, University Library of Munich, Germany.

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