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Optimal growth in overlapping generations with a directly polluting sector and an indirect one

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  • Pierre-André Jouvet
  • Philippe Michel
  • Gilles Rotillon

Abstract

We study the optimal growth path and its decentralization in an overlapping generations model with two consumption goods and pollution effect. We consider two production sector i.e. one with a direct effect of pollution and the other with an indirect pollution effect by using energy. In the presence of externalities, decentralization of an optimal path needs some specific taxes in addition to lump-sum transfers. The introduction of a market for pollution permits, concerning only the polluting sector, neutralizes the external environmental effects. We show that there is a unique management of permits such that the equilibrium coincides with the optimal path: all permits should be auctioned i.e. no free permits to firms. This conclusion is in contradiction with the usual practice of grandfathering.

Suggested Citation

  • Pierre-André Jouvet & Philippe Michel & Gilles Rotillon, 2006. "Optimal growth in overlapping generations with a directly polluting sector and an indirect one," EconomiX Working Papers 2006-1, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2006-1
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    References listed on IDEAS

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    1. Jouvet, Pierre-Andre & Michel, Philippe & Rotillon, Gilles, 2005. "Optimal growth with pollution: how to use pollution permits?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1597-1609, September.
    2. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    3. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, October.
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    More about this item

    Keywords

    Optimal growth; environment; market of permits.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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