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Consumption Externalities, Production Externalities, and the Accumulation of Capital

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  • Wen-Fang Liu
  • Stephen Turnovsky

Abstract

We analyze the effects of consumption and production externalities on the long-run rate of capital accumulation. We show that the importance of consumption externalities depends upon whether or not labor supply is fixed. In the case that it is fixed, they have no long-run effects. Whether they have any distortionary effect on the transitional path depends upon the form of utility function. The effects of production externalities are more pervasive; they exert long-run distortionary effects irrespective of labor supply. The optimal taxation to correct for the distortions created by the externalities is characterized. We analyze both stationary and endogenously growing economies, and while there are many parallels in how externalities impact, there are also important differences.

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Bibliographic Info

Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2002-13-P.

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Date of creation: Nov 2003
Date of revision: Nov 2003
Publication status: Published in Journal of Public Economics, Volume 89, 2005, 1097-1129
Handle: RePEc:udb:wpaper:uwec-2002-13-p

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Cited by:
  1. Fisher, Walter H. & Hof, Franz X., 2005. "The Quest for Status and Endogenous Labor Supply. The Relative Wealth Framework," Economics Series 181, Institute for Advanced Studies.
  2. Fisher, Walter H. & Heijdra, Ben J., 2008. "Growth and the Ageing Joneses," Economics Series 230, Institute for Advanced Studies.
  3. Pintea, Mihaela I., 2010. "Leisure externalities: Implications for growth and welfare," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1025-1040, December.
  4. Mino, Kazuo, 2006. "Consumption Externalities and Capital Accumulation in an Overlapping Generations Economy," MPRA Paper 17016, University Library of Munich, Germany.
  5. Fisher, Walter H. & Heijdra, Ben J., 2009. "Keeping up with the ageing Joneses," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 53-64, January.
  6. Andrew B. Abel, 2003. "Optimal Taxation When Consumers Have Endogenous Benchmark Levels of Consumption," NBER Working Papers 10099, National Bureau of Economic Research, Inc.

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