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Can Waste Improve Welfare?

  • Pelloni, A.
  • Waldmann, R.

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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Paper provided by European University Institute in its series Economics Working Papers with number eco97/12.

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Length: 23 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:eui:euiwps:eco97/12
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