Environment, growth, and optimal policy design

Abstract

A simple dynamic representative agent model is presented in which the environment enters into the utility and production functions to analyze long-run economic growth under optimal policy designs. The policies that are considered are production taxes or subsidies and quantitative restrictions. Optimal levels of these instruments are designed by a regulator such that (a) the equilibrium growth path mimics the efficient growth path, and (b) the letter is maximized. One finding is that a combination of quantity controls and optimal tax (subsidy) schemes leads to a higher level of social welfare than an optimal tax (subsidy) scheme alone.