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Can Waste Improve Welfare?

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  • Pelloni, A.
  • Waldmann, R.

Abstract

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.

Suggested Citation

  • Pelloni, A. & Waldmann, R., 1997. "Can Waste Improve Welfare?," Economics Working Papers eco97/12, European University Institute.
  • Handle: RePEc:eui:euiwps:eco97/12
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. What’s wrong with Economath ?
      by Robert Waldmann in Angry Bear on 2013-08-22 13:53:13
    2. Possible efficiency gains due to taxes and transfe...
      by Robert in Robert's Stochastic Thoughts on 2007-06-11 17:43:00

    Citations

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    Cited by:

    1. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
    2. Gunther Rehme, 2002. "Distributive Policies and Economic Growth: An Optimal Taxation Approach," Metroeconomica, Wiley Blackwell, vol. 53(3), pages 315-338, August.
    3. Long, Xin & Pelloni, Alessandra, 2017. "Factor income taxation in a horizontal innovation model," Journal of Public Economics, Elsevier, vol. 154(C), pages 137-159.
    4. Mino, Kazuo, 2001. "Optimal taxation in dynamic economies with increasing returns," Japan and the World Economy, Elsevier, vol. 13(3), pages 235-253, August.
    5. Mino, Kazuo, 2003. "Human Capital Formation and Patterns of Growth with Multiple Equilibria," MPRA Paper 58146, University Library of Munich, Germany.
    6. Landsburg, Steven E., 2014. "In praise of wasteful spending," Economics Letters, Elsevier, vol. 124(3), pages 449-451.
    7. Mino, Kazuo, 2002. "Indeterminacy in Two-Sector Models of Endogenous Growth with Leisure," MPRA Paper 16994, University Library of Munich, Germany.
    8. Wen-ya Chang & Hsueh-fang Tsai & Juin-jen Chang & Kuo-Hao Lee, 2015. "Consumption tax, seigniorage tax and tax switch in a cash-in-advance economy of endogenous growth," Journal of Economics, Springer, vol. 114(1), pages 23-42, January.
    9. Barañano, Ilaski & San Martín, Marta, 2020. "On the indeterminacy of equilibrium in an endogenous growth model with non-separable preferences," Mathematical Social Sciences, Elsevier, vol. 108(C), pages 81-89.
    10. Jun-ichi Itaya & Naoshige Kanamori, 2010. "Consumption taxation, social status and indeterminacy in models of endogenous growth with elastic labor supply," Journal of Economics, Springer, vol. 100(2), pages 141-163, June.
    11. Barbara Annicchiarico & Valentina Antonaroli & Alessandra Pelloni, 2020. "Optimal Factor Taxation in A Scale Free Model of Vertical Innovation," Working Paper series 20-20, Rimini Centre for Economic Analysis.
    12. Itaya, Jun-ichi, 2008. "Can environmental taxation stimulate growth? The role of indeterminacy in endogenous growth models with environmental externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1156-1180, April.
    13. Hsiu-Yun Lee & Yu-Lin Wang & Wen-Ya Chang, 2013. "Can growth-enhanced monetary policy improve welfare when people seek social status?," Journal of Economics, Springer, vol. 110(3), pages 257-272, November.

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    More about this item

    Keywords

    INVESTMENTS ; TAXES ; EXTERNALITIES;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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