Environmental Policies in a Stagnant Economy

Abstract

Using a dynamic optimization model of a monetary economy where persistent unemployment can prevail, we examine the effects of environmental policies on consumption and pollution emissions in a full-employment and a stagnant economy. If full employment prevails, environmental policies such as environmental tax and public pollution abatement naturally crowd out commodity production and hence decrease consumption. However, if unemployment appears, they stimulate consumption and production by increasing total employment and mitigating deflation, thus yielding additional pollution emissions. Net pollution emissions may eventually increase. The optimal environmental policy mix is also examined.