Dynamic Inefficiency in an Overlapping Generation Economy with Pollution and Health Costs

Resumen

We analyze an overlapping generations model in which pollution arises, in an accumulative way, from production. Households do not care directly about the environment, however pollution makes them incur health costs when they are elderly. We show that the presence of pollution makes the economy more likely to be dynamically ine.cient. For these cases we analyze two kinds of tax scheme: one based on production taxes and the other based on capital and wage taxes. We show how to design both schemes in order to put the economy into the golden rule allocation. We also show that under the production tax scheme young agents pay less taxes (or receive more transfers) than under the capital-wage tax system. The ederly population is indi.erent in regard to the two tax systems. Thus the production tax scheme is superior in an electoral context.