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Habit Formation in the Environmental Quality: Dynamic Optimal Environmental Taxation


  • Löfgren, Åsa

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)


In this article we propose a model in which individuals experience habit formation in environmental quality. Further, a consumption good causes a negative external effect on the environment.The intertemporal utility of a benevolent social planner depends on consumption of two goods and the environment. Hence, the choice of the social planner is to maximize utility given the negative effect of the consumption good on the environment,taking into account that there is habit formation in environmental quality. Given a simple model we show that the level and time path of the optimal tax is affected by the assumption of habit formation; more specifically the stronger the habit, the higher the optimal level of environmental quality in steady state, and the faster the transition towards the steady state tax level. Furthermore the initial value of the habit stock is of crucial importance for the time path of the tax. Also, we solve for, and analyze, dynamics and the existence and characteristics of equilibria in the model and discuss how the characteristics of the habit formation affect steady state.

Suggested Citation

  • Löfgren, Åsa, 2003. "Habit Formation in the Environmental Quality: Dynamic Optimal Environmental Taxation," Working Papers in Economics 92, University of Gothenburg, Department of Economics.
  • Handle: RePEc:hhs:gunwpe:0092

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    References listed on IDEAS

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    Cited by:

    1. Masako Ikefuji, 2008. "Habit formation in an endogenous growth model with pollution abatement activities," Journal of Economics, Springer, vol. 94(3), pages 241-259, September.
    2. Akpalu, Wisdom & Parks, Peter J., 2007. "Natural resource use conflict: gold mining in tropical rainforest in Ghana," Environment and Development Economics, Cambridge University Press, vol. 12(01), pages 55-72, February.

    More about this item


    Habit formation; environment; intertemporal choice; transitional dynamics;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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