Skip to main content

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

International Tax and Public Finance volume 17, pages 607–626 (2010)Cite this article

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.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price includes VAT (Canada)

References

  • Aiyagari, S. R., Marcet, A., Sargent, T., & Seppälä, J. (2002). Optimal taxation without state-contingent debt. Journal of Political Economy, 110, 1220–1254.

    Article  Google Scholar 

  • Auerbach, A. J., & Hines, J. R. (2001). Taxation and economic efficiency (NBER Working Paper No. 8181). March 2001.

  • Bovenberg, A. L., & de Mooij, R. A. (1997). Environmental tax reform and endogenous growth. Journal of Public Economics, 63, 207–237.

    Article  Google Scholar 

  • Bovenberg, A. L., & Goulder, L. H. (1996). Optimal environmental taxation in the presence of other taxes: General-Equilibrium analyses. American Economic Review, 86, 985–1000.

    Google Scholar 

  • Bovenberg, A. L., & Goulder, L. H. (2002). Environmental taxation and regulation. In Handbook of public economics (Vol. 3, pp. 1471–1545).

  • Bovenberg, A. L., & van der Ploeg, F. (1994). Environmental policy, public finance and the labor market in a second-best world. Journal of Public Economics, 55, 349–390.

    Article  Google Scholar 

  • Cassou, S. P., & Gorostiaga, A. (2009). Optimal fiscal policy in a multisector model: the price consequences of government spending. Journal of Public Economic Theory, 11, 177–201.

    Article  Google Scholar 

  • Cassou, S. P., & Hamilton, S. F. (2005). The transition from dirty to clean industries: optimal fiscal policy and the environmental Kuznets curve. Journal of Environmental Economics and Management, 48, 1050–1077.

    Article  Google Scholar 

  • Cassou, S. P., & Lansing, K. J. (1998). Optimal fiscal policy, public capital, and the productivity slowdown. Journal of Economic Dynamics and Control, 22, 911–935.

    Article  Google Scholar 

  • Cassou, S. P., & Lansing, K. J. (2006). Tax reform with useful public expenditures. Journal of Public Economic Theory, 8, 631–676.

    Article  Google Scholar 

  • Chamley, C. (1986). Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica, 54, 607–622.

    Article  Google Scholar 

  • Chari, V. V., Christiano, L. J., & Kehoe, P. J. (1994). Optimal fiscal policy in a business cycle model. Journal of Political Economy, 102, 617–652.

    Article  Google Scholar 

  • Dasgupta, S., Laplante, B., Wang, H., & Wheeler, D. (2002). Confronting the environmental Kuznets curve. Journal of Economic Perspectives, 16, 147–168.

    Article  Google Scholar 

  • Easterly, W., & Rebelo, S. (1993a). Fiscal policy and economic growth. Journal of Monetary Economics, 32, 417–458.

    Article  Google Scholar 

  • Easterly, W., & Rebelo, S. (1993b). Marginal income tax rates and economic growth in developing countries. European Economic Review, 37, 409–417.

    Article  Google Scholar 

  • Gorostiaga, A. (2003). Should fiscal policy be different in a non-competitive framework? Journal of Monetary Economics, 50, 1311–1331.

    Article  Google Scholar 

  • Gorostiaga, A. (2005). Optimal fiscal policy with rationing in the labor market. Topics in Macroeconomics, 5(1), Article 17.

    Google Scholar 

  • Goulder, L. H. (1995). The effect of carbon taxes in an economy with prior distortions: an intertemporal general equilibrium analysis. Journal of Environmental Economics and Management, 29, 271–297.

    Article  Google Scholar 

  • Jones, L. E., Manuelli, R. E., & Rossi, P. E. (1993). Optimal taxation in models of endogenous growth. Journal of Political Economy, 101, 485–517.

    Article  Google Scholar 

  • Jones, L. E., Manuelli, R. E., & Rossi, P. E. (1997). On the optimal taxation of capital income. Journal of Economic Theory, 73, 93–117.

    Article  Google Scholar 

  • Jorgenson, D. W., & Wilcoxen, P. J. (1993). Reducing US carbon emissions: an econometric general equilibrium assessment. Resource and Energy Economics, 15(1), 7–25.

    Article  Google Scholar 

  • Judd, K. L. (1985). Redistributive taxation in a simple perfect foresight model. Journal of Public Economics, 28, 59–83.

    Article  Google Scholar 

  • Judd, K. L. (1999). Optimal taxation and spending in general competitive growth models. Journal of Public Economics, 71, 1–26.

    Article  Google Scholar 

  • Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of Public Economics, 89, 1027–1043.

    Article  Google Scholar 

  • Lopez, R. (1994). The environment as a factor of production: the effects of economic growth and trade liberalization. Journal of Environmental Economics and Management, 27, 163–184.

    Article  Google Scholar 

  • Lucas, R. E., Jr. (1990). Supply-side economics: an analytical review. Oxford Economics Papers, 42, 293–316.

    Google Scholar 

  • Lucas, R. E., Jr., & Stokey, N. L. (1983). Optimal monetary and fiscal policy in an economy without capital. Journal of Monetary Economics, 12, 55–94.

    Article  Google Scholar 

  • Poterba, J. M. (1993). Global warming: a public finance perspective. Journal of Economic Perspectives, 7, 47–63.

    Google Scholar 

  • Ramsey, F. P. (1927). A contribution to the theory of taxation. Economic Journal, 37, 47–61.

    Article  Google Scholar 

  • Sandmo, A. (1975). Optimal taxation in the presence of externalities. Swedish Journal of Economics, 75, 86–98.

    Article  Google Scholar 

  • Stokey, N. L., & Rebelo, S. (1995). Growth effects of flat-rate taxes. Journal of Political Economy, 103, 519–550.

    Article  Google Scholar 

  • Zhu, X. (1992). Optimal fiscal policy in a stochastic growth model. Journal of Economic Theory, 58, 250–289.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Kansas State University, 327 Waters Hall, Manhattan, KS, 66506, USA

    Steven P. Cassou

  2. Universidad del País Vasco, Avda. Lehendakari Aguirre, 83, 48015, Bilbao, Spain

    Arantza Gorostiaga & María José Gutiérrez

  3. Cal Poly State University, San Luis Obispo, CA, 93407, USA

    Stephen F. Hamilton

Authors
  1. Steven P. Cassou
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Arantza Gorostiaga
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. María José Gutiérrez
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Stephen F. Hamilton
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Steven P. Cassou.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Cassou, S.P., Gorostiaga, A., Gutiérrez, M.J. et al. Second-best tax policy and natural resource management in growing economies. Int Tax Public Finance 17, 607–626 (2010). https://doi.org/10.1007/s10797-010-9130-3

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10797-010-9130-3

Keywords

  • Growth
  • Natural resources
  • Elasticity of substitution
  • Second-best policy

JEL Classification

  • H23
  • O41
  • Q28