Implementing steady state efficiency in overlapping generations economies with environmental externalities

We consider in this paper overlapping generations economies with pollution resulting from both consumption and production. The competitive equilibrium steady state is compared to the optimal steady state from the social planner's viewpoint. We show that the dynamical inefficiency of competitive equilibrium steady state with capital-labor ratio exceeding the golden rule ratio still holds. Moreover, the range of dynamically efficient steady state capital ratios increases with the effectiveness of the environment maintainance technology, and decreases for more polluting production technologies. We characterize some tax and transfer policies that decentralize as a competitive equilibrium outcome the transition to the social planner's steady state.