This paper studies the infuence of consumption externalities in the Ramsey model. In contrast to the recent literature, a quite general specification of preferences is used and the concept of the effective intertemporal elasticity of substitution is introduced. We give conditions for the observational equivalence between economies with consumption externalities and externality-free economies. An additional key result is that there exist several types of instantaneous utility functions in which the decentralized solution coincides with the socially planned one in spite of the presence of consumption externalities. The conditions for optimal taxation are also derived.
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Paper provided by Institute for Advanced Studies in its series Economics Series with number
77.
Find related papers by JEL classification: D62 - Microeconomics - - Welfare Economics - - - Externalities D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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