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State-Variable Public Goods When Relative Consumption Matters: A Dynamic Optimal Taxation Approach

Author

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  • Aronsson, Thomas

    () (Department of Economics, Umeå University)

  • Johansson-Stenman, Olof

    () (Department of Economics, School of Business, Economics and Law, University of Gothenburg)

Abstract

This paper concerns the optimal provision of a state-variable public good, where the global climate is the prime example. The analysis is based on a two-type optimal income tax model with overlapping generations, where people care about their relative consumption. We consider both keeping-up-with-the-Joneses preferences (where people compare their own current consumption with others’ current consumption) and catching-up-with-the-Joneses preferences (where people compare their own current consumption with others’ past consumption). The extent to which the rule for public provision ought to be modified is shown to depend crucially on the preference elicitation format.

Suggested Citation

  • Aronsson, Thomas & Johansson-Stenman, Olof, 2011. "State-Variable Public Goods When Relative Consumption Matters: A Dynamic Optimal Taxation Approach," Umeå Economic Studies 828, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0828
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    References listed on IDEAS

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    More about this item

    Keywords

    State variable public goods; asymmetric information; relative consumption; status; positional preferences; climate policy;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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