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First-and second-best allocations under economic and environmental uncertainty

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Listed:
  • Konstantinos Angelopoulos
  • George Economides
  • Apostolis Philippopoulos

Abstract

This paper uses a micro-founded DSGE model to compare second-best optimal environmental policy, and the resulting Ramsey allocation, to first-best allocation. The focus is on the source and size of uncertainty, and how this affects optimal choices and the comparison between second- and first-best. While higher economic volatility is bad for social welfare in all cases studied, the welfare effects of higher environmental volatility depend on its size and the effectiveness of public abatement policy. The Ramsey environmental tax is pro-cyclical when there is an economic shock, while it is counter-cyclical when there is an environmental shock. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2013. "First-and second-best allocations under economic and environmental uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 360-380, June.
    • Handle: RePEc:kap:itaxpf:v:20:y:2013:i:3:p:360-380
    DOI: 10.1007/s10797-012-9234-z
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    More about this item

    Keywords

    General equilibrium; Uncertainty; Environmental policy; Second best; C68; D81; H23;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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