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Can waste improve welfare?

  • Pelloni, Alessandra
  • Waldmann, Robert

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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 77 (2000)
Issue (Month): 1 (July)
Pages: 45-79

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Handle: RePEc:eee:pubeco:v:77:y:2000:i:1:p:45-79
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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