Essays on the impact of pollution externalities on economic activity
thesisposted on 16.01.2017, 16:51 by Alessandro Vescia
This thesis considers how pollution affects economic activities. Chapters 2 considers effects of pollution on humans' health. In an overlapping generation model with capital accumulation, agents' status is negatively affected by pollution. Individuals may invest in private health to reduce the burden of the environmental degradation, but this reduces the aggregate savings. Lower savings reduce the capital accumulation dynamic, reducing the optimal growth of the economy. The government can intervene to improve agents' health with public health spending, which crowds out private health investment and is complementary to savings. This work shows that, according to the initial level of capital of the economy and to the “net dirtiness", i.e. the difference of the pollution elasticity with respect to output minus the public health spending elasticity, the economy experiences different longrun growth equilibriums. Chapter 3 evaluates and compare the capacity of an emission tax and of free issued (non-auctioned) permits in terms of the incentives in investing in emission abatement research and in the social welfare. In the model, firms compete a la Cournot with knowledge spillovers. There are two different timing of the game: one where the government can credibly commit to the level of environmental policy; and the second timing where the government cannot credibly commit, and adjust optimally the policy after the firms innovate. This work shows that firms invest more in research when the government can credibly commit to the chosen level of policy. Chapter 4 investigates the role of pollution as a source of income inequality. Blackburn and Chivers (2015), in an overlapping generation model without credit market imperfections but in presence of loss aversion and uncertain return of investment, model agents that inherited from their parent and leave as a bequest to their offspring a positive amount of human capital. If the human capital is below a certain threshold, the loss aversion strongly influence agents, thus avoiding the investment. This reduces their possibility of realising profits and agents may end up in a low-income growth equilibrium with persistent income inequality. We extend their model introducing the pollution flow, which reduces the productivity of human capital and an abatement policy, which mitigates the negative effect of pollution. This work shows that in the presence of pollution, income inequality may increase and that the government can mitigate it through pollution abatement.