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  On the fiscal strategies of escaping poverty-environment traps towards sustainable growth

Thang Dao, N., Edenhofer, O. (2018): On the fiscal strategies of escaping poverty-environment traps towards sustainable growth. - Journal of Macroeconomics, 55, 253-273.
https://doi.org/10.1016/j.jmacro.2017.10.007

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Thang Dao, N.1, Author
Edenhofer, Ottmar2, Author              
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1External Organizations, ou_persistent22              
2Potsdam Institute for Climate Impact Research, ou_persistent13              

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 Abstract: We develop an overlapping generations (OLG) model with two intermediate inputs, clean and dirty, and one final output in order to consider the interplay between the environment, life expectancy, and capital accumulation, and to consider the possibilities of reallocating capital between the clean and dirty sectors to improve social welfare. We show that the multiple distinct steady states, (and even the continuum of steady state), may occur in a competitive economy. Hence, an economy may fall into a poverty-environment trap that is characterized by low environmental quality, low life expectancy, and therefore, low per capita physical capital, while the others may converge to the opposite steady state. The competitive steady states differ from the first-best steady state in the benevolent social planner’s viewpoint not only because of imperfect altruism between generations in the competitive economy, but also because individuals cannot internalize the effects of their savings (capital accumulation) and capital allocation on environmental quality through producing dirty intermediate inputs, whereas the social planner can. So we propose fiscal strategies towards social planner’s steady state. These fiscal strategies, which are combination of traditional Pigouvian taxes and capital income tax implemented for transition phase are quite new compared to the existing related literature. Although we focus on the transition phase, the proposed taxes are stationary. They include: (i) a set of tax and subsidy imposed on the production of dirty and clean intermediate inputs to improve environmental quality, and therefore, life expectancy and capital accumulation, in order to guarantee that an economy that is locked in a poverty-environment trapcan escape such the stagnation; and (ii) a set of taxes (subsidies) imposed on the production of intermediate inputs and capital income in order to decentralize the transition to the first-best steady state as a competitive outcome.

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 Dates: 2018
 Publication Status: Finally published
 Pages: -
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 Rev. Type: Peer
 Identifiers: DOI: 10.1016/j.jmacro.2017.10.007
PIKDOMAIN: Sustainable Solutions - Research Domain III
Organisational keyword: RD3 - Transformation Pathways
eDoc: 8096
Research topic keyword: Climate Policy
Research topic keyword: Economics
Research topic keyword: Inequality and Equity
 Degree: -

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Title: Journal of Macroeconomics
Source Genre: Journal, SCI, Scopus
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Pages: - Volume / Issue: 55 Sequence Number: - Start / End Page: 253 - 273 Identifier: CoNE: https://publications.pik-potsdam.de/cone/journals/resource/Journal-Macroeconomics