ENVIRONMENT, GROWTH, AND OPTIMAL POLICY DESIGN

A simple dynamic representative agent model is presented in which the environment enters into the utility and production functions to analyz e long-run economic growth under optimal policy designs. The policies that are considered are production taxes or subsidies and quantitative restrictions. Optimal levels of these instruments are designed by a r egulator such that (a) the equilibrium growth path mimics the efficien t growth path, and (b) the latter is maximized. One finding is that a combination of quantity controls and optimal tax (subsidy) schemes lea ds to a higher level of social welfare than an optimal tax (subsidy) s cheme alone.