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Dynamic Inefficiency in an Overlapping Generation Economy with Pollution and Health Costs

We analyze an overlapping generations model in which pollution arises, in an accumulative way, from production. Households do not care directly about the environment, however pollution makes them incur health costs when they are elderly. We show that the presence of pollution makes the economy more likely to be dynamically inefficient. For these cases we analyze two kinds of tax scheme: one based on production taxes and the other based on capital and wage taxes. We show how to design both schemes in order to put the economy into the golden rule allocation. We also show that under the production tax scheme young and elderly agents pay less taxes (or receive more transfers) than under the capital and wage tax system.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/38.

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Length: 35 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cea:doctra:e2004_38
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  1. Reis, Ana Balcao, 2001. "Endogenous Growth and the Possibility of Eliminating Pollution," Journal of Environmental Economics and Management, Elsevier, vol. 42(3), pages 360-373, November.
  2. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1992. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," American Economic Review, American Economic Association, vol. 82(5), pages 1177-98, December.
  3. Gangagharan, L. & Valenzuela, M.R., 2000. "Interrelationships between Income, Health and the Environment: Extending the Environmental Kuznets Curve Hypothesis," Department of Economics - Working Papers Series 740, The University of Melbourne.
  4. Tetsuo Ono & Yasuo Maeda, 2001. "Is Aging Harmful to the Environment?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(2), pages 113-127, October.
  5. Howarth, Richard B, 1998. " An Overlapping Generations Model of Climate-Economy Interactions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 575-91, September.
  6. Chao, Hung-po & Peck, Stephen, 2000. "Greenhouse gas abatement: How much? and Who pays?," Resource and Energy Economics, Elsevier, vol. 22(1), pages 1-20, January.
  7. Jouvet, Pierre-Andre & Michel, Philippe & Vidal, Jean-Pierre, 2000. " Intergenerational Altruism and the Environment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 135-50, March.
  8. Roberton C. Williams, 2000. "Environmental Tax Interactions When Pollution Affects Health or Productivity," NBER Working Papers 8049, National Bureau of Economic Research, Inc.
  9. Grimaud, Andre, 1999. "Pollution Permits and Sustainable Growth in a Schumpeterian Model," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 249-266, November.
  10. Ono, Tetsuo & Maeda, Yasuo, 2001. "Sustainable Development in an Aging Economy," Discussion Paper 32, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  11. Bovenberg, A. Lans & Heijdra, Ben J., 1998. "Environmental tax policy and intergenerational distribution," Journal of Public Economics, Elsevier, vol. 67(1), pages 1-24, January.
  12. Guruswamy Babu, P. & Kavi Kumar, K. S. & Murthy, N. S., 1997. "An overlapping generations model with exhaustible resources and stock pollution," Ecological Economics, Elsevier, vol. 21(1), pages 35-43, April.
  13. Quah, Euston & Boon, Tay Liam, 2003. "The economic cost of particulate air pollution on health in Singapore," Journal of Asian Economics, Elsevier, vol. 14(1), pages 73-90, February.
  14. Edmond S. Phelps, 1964. "Second Essay on the Golden Rule of Accumulation," Cowles Foundation Discussion Papers 173, Cowles Foundation for Research in Economics, Yale University.
  15. Howarth, Richard B & Norgaard, Richard B, 1992. "Environmental Valuation under Sustainable Development," American Economic Review, American Economic Association, vol. 82(2), pages 473-77, May.
  16. Solow, Robert M, 1986. " On the Intergenerational Allocation of Natural Resources," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 141-49.
  17. John, A. & Pecchenino, R. & Schimmelpfennig, D. & Schreft, S., 1995. "Short-lived agents and the long-lived environment," Journal of Public Economics, Elsevier, vol. 58(1), pages 127-141, September.
  18. Ono, Tetsuo, 1996. "Optimal tax schemes and the environmental externality," Economics Letters, Elsevier, vol. 53(3), pages 283-289, December.
  19. John, A & Pecchenino, R, 1994. "An Overlapping Generations Model of Growth and the Environment," Economic Journal, Royal Economic Society, vol. 104(427), pages 1393-1410, November.
  20. Boyce, James K. & Klemer, Andrew R. & Templet, Paul H. & Willis, Cleve E., 1999. "Power distribution, the environment, and public health: A state-level analysis," Ecological Economics, Elsevier, vol. 29(1), pages 127-140, April.
  21. Padilla, Emilio, 2002. "Intergenerational equity and sustainability," Ecological Economics, Elsevier, vol. 41(1), pages 69-83, April.
  22. Alberini, Anna & Cropper, Maureen & Fu, Tsu-Tan & Krupnick, Alan & Liu, Jin-Tan & Shaw, Daigee & Harrington, Winston, 1997. "Valuing Health Effects of Air Pollution in Developing Countries: The Case of Taiwan," Journal of Environmental Economics and Management, Elsevier, vol. 34(2), pages 107-126, October.
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