Optimal Taxation with Endogenous Population Growth and the Risk of Environmental Disaster

Abstract

This study considers a market economy where firms produce goods from labor and capital and households supply labor, rear children, save in capital, promote their members' health and longevity by health care and derive utility from their consumption and children, without caring of their adult offspring. There is a risk that population growth and capital accumulation trigger a lethal environmental disaster. Optimal policy is solved by a game where the government is the leader and the representative household the follower. The solution yields precautionary taxes on both capital income and health care. ; Peer reviewed