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Energy taxes and endogenous technological change

  • Peretto, Pietro F.

This paper studies the effects of a tax on energy use in a growth model where market structure is endogenous and jointly determined with the rate of technological change. Because this economy does not exhibit the scale effect (a positive relation between TFP growth and aggregate R&D), the tax has no effect on the steady-state growth rate. It has, however, important transitional effects that give rise to surprising results. Specifically, under the plausible assumption that energy demand is inelastic, there may exist a hump-shaped relation between the energy tax and welfare. This shape stems from the fact that the reallocation of resources from energy production to manufacturing triggers a temporary acceleration of TFP growth that generates a [radical sign]-shaped time profile of consumption. If endogenous technological change raises consumption sufficiently fast and by a sufficient amount in the long run, and households are sufficiently patient, the tax raises welfare despite the fact that--in line with standard intuition--it lowers consumption in the short run.

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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 57 (2009)
Issue (Month): 3 (May)
Pages: 269-283

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Handle: RePEc:eee:jeeman:v:57:y:2009:i:3:p:269-283
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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  1. Pietro Peretto & Sjak Smulders, 2002. "Technological Distance, Growth And Scale Effects," Economic Journal, Royal Economic Society, vol. 112(481), pages 603-624, July.
  2. William A. Brock & M. Scott Taylor, 2004. "Economic Growth and the Environment: A Review of Theory and Empirics," NBER Working Papers 10854, National Bureau of Economic Research, Inc.
  3. Jinli Zeng & Jie Zhang, 2001. "Long-run growth effects of taxation in a non-scale growth model with innovation," Departmental Working Papers wp0104, National University of Singapore, Department of Economics.
  4. Peretto, Pietro F., 1996. "Technological Change and Population Growth," Working Papers 96-28, Duke University, Department of Economics.
  5. Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, vol. 114(495), pages 281-303, 04.
  6. repec:ner:tilbur:urn:nbn:nl:ui:12-123121 is not listed on IDEAS
  7. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
  8. Smulders, Sjak & de Nooij, Michiel, 2003. "The impact of energy conservation on technology and economic growth," Resource and Energy Economics, Elsevier, vol. 25(1), pages 59-79, February.
  9. Hamilton, James D, 1988. "A Neoclassical Model of Unemployment and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 593-617, June.
  10. Peretto, Pietro F., 1999. "Cost reduction, entry, and the interdependence of market structure and economic growth," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 173-195, February.
  11. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  12. repec:ner:tilbur:urn:nbn:nl:ui:12-89730 is not listed on IDEAS
  13. Xepapadeas, Anastasios, 2005. "Economic growth and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 23, pages 1219-1271 Elsevier.
  14. Pietro Peretto & Michelle Connolly, 2007. "The Manhattan Metaphor," Journal of Economic Growth, Springer, vol. 12(4), pages 329-350, December.
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