Second-best tax policy and natural resource management in growing economies

Abstract

This paper investigates the exploitation of natural resources in a growing economy within a second-best fiscal policy framework. Agents derive utility from two types of consumption goods—one which relies on a natural resource input and one which does not—as well as from leisure and from natural resource amenity values. We connect second best policy to essential components of utility by considering the elasticity of substitution among each of the four utility arguments. The results illustrate potentially important relationships between amenity values and leisure. When amenity values are complementary with leisure, for instance when natural resources are used for recreation, optimal taxes on goods produced with natural resources generally increase over time. On the other hand, optimal taxes on goods produced from natural resources generally decrease over time when leisure and amenity values are substitutes. Under some parameterizations, complex dynamics leading to non-monotonic time paths can emerge.