Working Paper: NBER ID: w27445
Authors: John Gibson; Garth Heutel
Abstract: We study the relationship between unemployment, environmental policy, and business cycles. We develop a dynamic stochastic general equilibrium real business cycle model that includes both a pollution externality and congestion externalities from labor market search frictions, which generate unemployment. We consider two policies to address the market failures: an emissions tax and a tax or subsidy on job creation. With both policies present, the efficient outcome can be achieved. When one policy is constrained or absent, we solve for the second best. The absence of a vacancy policy to address the congestion externalities substantially affects the value of the emissions tax, both in steady state and over the business cycle.
Keywords: pollution; labor market; business cycle; environmental policy; unemployment
JEL Codes: E24; E32; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pollution externality (D62) | inefficiencies in employment levels (J68) |
| pollution externality (D62) | inefficiently high level of employment (J68) |
| vacancy tax (H26) | correct inefficiencies caused by labor market congestion externalities (J69) |
| hiring tax or subsidy (H20) | induce efficiency by internalizing congestion externalities (D61) |
| unregulated equilibrium (D50) | higher pollution and higher employment than the efficient outcome (Q52) |
| absence of one tax (H26) | efficient outcome can be achieved with adjustment of the second tax (H21) |
| vacancy tax is unavailable (H26) | efficient emissions tax significantly higher (Q58) |