"Second-Best Tax Policy in a Growing Economy with Externalities", joint with Steve Cassou (Kansas State University), María José Gutiérrez (Universidad del País Vasco, UPV/EHU) and Steve Hamilton (Cal Poly State University), International Tax and Public Finance Vol. 17 (6), pp.607-626, 2010.

Abstract. This paper investigates the exploitation of environmental resources in a growing economy within a second-best fiscal policy framework. Agents derive utility from two types of consumption goods .one which relies on an environmental input and one which does not .as well as from leisure and from environmental amenity values. Property rights for the environmental resource are potentially incomplete. We connect second best policy to essential components of utility by considering the elasticity of substitution among each of the four utility arguments. The results illustrate potentially important relationships between environmental amentity values and leisure. When amenity values are complementary with leisure, for instance when environmental amenities are used for recreation, taxes on extractive goods generally increase over time. On the other hand, optimal taxes on extractive goods generally decrease over time when leisure and environmental amenity values are substitutes. Under some parameterizations, complex dynamics leading to non-monotonic time paths for the state variables can emerge.

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