Pollution and Labor Market Search Externalities Over the Business Cycle

67 Pages Posted: 29 Jun 2020 Last revised: 28 Jun 2024

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John Gibson

University of Texas at El Paso

Garth Heutel

Georgia State University

Date Written: June 2020

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.

Suggested Citation

Gibson, John and Heutel, Garth, Pollution and Labor Market Search Externalities Over the Business Cycle (June 2020). NBER Working Paper No. w27445, Available at SSRN: https://ssrn.com/abstract=3637746

John Gibson (Contact Author)

University of Texas at El Paso ( email )

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Garth Heutel

Georgia State University ( email )

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