Implementing steady state efficiency in overlapping generations economies with environmental externalities

Abstract

We consider in this paper overlapping generations economies with polution resulting from both consumption and production. The competitive equilibrium steady state is compared to the optimal steady state from the social planner's viewpoint. We show that any competitive equilibrium steady state whose capital-labor ratio exceeds the golden rule ratio is dynamically inefficient. Moreover, the range of dynamically efficient steady states capital ratios increases with the effectiveness of the environment maintainance technology, and decreases for more polluting production technologies. We characterize some tax and transfer policies that decentralize as a competitive equilibrium outcome the social planner's steady state.Overlapping generations, environmental externality, tax and transfer policy.