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Environmental Externality on Production in an OLG Economy

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  • Hiroshi Danbara

    (Graduate School of Economics, Keio University)

Abstract

In this paper, we introduce the environmental externality into the Diamond (1965) model. The environmental externality affects on the production negatively. We define a socially optimal allocation and a competitive equilibrium, and obtain the first-order necessary conditions. In competitive equilibrium, both consumers and firms have no incentives to maintain the environment, hence competitive equilibrium allocation can not be socially optimal. Therefore we propose a tax scheme. Our model requires two types of taxes in order to achieve a social optimum.

Suggested Citation

  • Hiroshi Danbara, 2013. "Environmental Externality on Production in an OLG Economy," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-045, Keio/Kyoto Joint Global COE Program.
    • Handle: RePEc:kei:dpaper:2012-045
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    References listed on IDEAS

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