TY - JOUR
T1 - Consumption externality, efficiency and optimal taxation in one-sector growth model
AU - Chen, Been Lon
AU - Hsu, Mei
PY - 2009/11/1
Y1 - 2009/11/1
N2 - In an economy with consumption externalities, existing studies find that a competitive equilibrium is efficient in the long run and remains efficient in transitions if preferences are homothetic. This paper revisits the efficiency issue in an otherwise standard one-sector growth model where consumption externalities affect a utility via their effects on the time preference. We find that even if preferences are homothetic, the externality changes the marginal rate of substitution between now and future and leads to a disparity in the intertemporal elasticity of substitution between the centrally planned economy and a decentralized economy. As a result, a competitive equilibrium is inefficient in transition dynamics. We characterize an optimal tax/subsidy structure that enables the allocation in a decentralized economy to replicate the social optimum.
AB - In an economy with consumption externalities, existing studies find that a competitive equilibrium is efficient in the long run and remains efficient in transitions if preferences are homothetic. This paper revisits the efficiency issue in an otherwise standard one-sector growth model where consumption externalities affect a utility via their effects on the time preference. We find that even if preferences are homothetic, the externality changes the marginal rate of substitution between now and future and leads to a disparity in the intertemporal elasticity of substitution between the centrally planned economy and a decentralized economy. As a result, a competitive equilibrium is inefficient in transition dynamics. We characterize an optimal tax/subsidy structure that enables the allocation in a decentralized economy to replicate the social optimum.
KW - Consumption externalities
KW - Efficiency
KW - Endogenous time preferences
UR - http://www.scopus.com/inward/record.url?scp=69849094289&partnerID=8YFLogxK
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U2 - 10.1016/j.econmod.2009.06.008
DO - 10.1016/j.econmod.2009.06.008
M3 - Article
AN - SCOPUS:69849094289
VL - 26
SP - 1328
EP - 1334
JO - Economic Modelling
JF - Economic Modelling
SN - 0264-9993
IS - 6
ER -