Pollution effects on preferences: A unified approach. (13th December 2018)

• Record Type: Journal Article
• Authors: Bosi, Stefano; Desmarchelier, David; Ragot, Lionel
• Is Part Of: Journal of public economic theory. Volume 21:Number 3(2019)
• Page Start: 371
• Page End: 399
• Publication Date: 2018-12-13
• Subjects: endogenous labor supply -- green paradox -- limit cycle -- pollution -- Ramsey model; Economic policy -- Periodicals; Finance, Public -- Periodicals; 338.9005
• DOI: 10.1111/jpet.12348
• Languages: English
• ISSNs: 1097-3923

Abstract

Abstract: In this paper, we introduce a unified Ramsey model where pollution has an impact on preferences and affects both consumption demand and labor supply. Pollution comes from production activities and is viewed as a stock variable with a strong inertia. A government is introduced and levies a proportional tax on production to finance depollution expenditure. We find two interesting results when pollution raises the consumption demand (compensation effect). First, in the long run, a higher green‐tax rate increases the pollution level at the steady state (green paradox) when pollution raises the labor supply (disenchantment effect). Second, in the short run, local indeterminacy can arise through a Hopf bifurcation when pollution lowers the labor supply (leisure effect) even if pollution has a strong inertia.