Environmental Externality on Production in an OLG Economy
In this paper, we introduce the environmental externality into the Diamond (1965) model. The environmental externality affects on the production negatively. We define a socially optimal allocation and a competitive equilibrium, and obtain the first-order necessary conditions. In competitive equilibrium, both consumers and firms have no incentives to maintain the environment, hence competitive equilibrium allocation can not be socially optimal. Therefore we propose a tax scheme. Our model requires two types of taxes in order to achieve a social optimum.
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