This paper takes as given that (i) the burning of fossil fuel increases the carbon dioxide content in the atmosphere, which (ii) in turn leads to global heating and global climate change of a

We study optimal taxation when consumers have temptation and self-control problems. Embedding the class of preferences developed by Gul and Pesendorfer into a standard macroeconomic setting, we first prove, in a two-period model, that the optimal policy is to subsidize savings when consumers are tempted by “excessive” impatience. The savings subsidy improves welfare because it makes succumbing to temptation less attractive. We then study an economy with a long but finite horizon which nests, as a special case, the Phelps–Pollak–Laibson multiple-selves model (thereby providing guidance on how to evaluate welfare in this model). We prove that when period utility is logarithmic, the optimal savings subsidies increase over time for any finite horizon. Moreover, as the horizon grows large, the optimal policy prescribes a constant subsidy, in contrast to the well known Chamley–Judd result.

We analyse a Bewley-Huggett-Aiyagari incomplete-markets model with labour-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labour market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks and a complete set of contingent claims conditional on this risk. We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers' outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model—in steady state as well as stochastic ones—generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting.