Inequality, Growth, and Congestion Externalities

Abstract We describe and numerically simulate the aggregate and distributional properties of an endogenous growth model with an infrastructure externality which is subject to relative congestion. We show that the congested externality induces higher growth, greater inequality, labor/leisure trade-off ambiguities and an ineffective capital income tax for the government to achieve long-term redistribution goals. We demonstrate the economic implications of congestions in production and consumption externalities on the public to private capital ratio, growth and income distribution. Finally, we discuss alternative tax options for promoting inclusive growth.